AP Macroeconomics Unit 3 Review

Determinants of Aggregate Demand

Consumption, Gross Private Investment, Government Spending and Net Exports

Consumption (Consumer Wealth)

More wealth= More spending Less wealth= Less spending

Consumption (Consumer Expectations)

Positive expectation= More spending Negative expectation= Less spending

Consumption (Household Indebtedness)

Less debt= More spending More debt= Less spending

Consumption (Taxes)

Less taxes= More spending More taxes= Less spending

Gross Private Investment (Real Interest Rate)

Lower real interest rate= More investment Higher real interest rate= Less investment

Gross Private Investment (Expected Return)

Higher expected return= More investment Lower expected return= Less investment

Government Spending

More government spending= AD increase

Less government spending= AD decrease

Net Exports (Exchange Rates)

Strong $= More Imports and Fewer Exports Weak$= Fewer Imports and More Exports

Net Exports (Relative Income)

Strong Foreign Economies=More Exports Weak Foreign Economies= Less Exports

Determinants of Short Run Aggregate Supply

Input prices, Productivity, and Legal-Institutional Environment

Input Prices (Foreign Resource Price)

Strong $= lower Weak$= higher

Input Prices (Market Power)

Increases in resource prices= SRAS Increase Decrease in resource price= SRAS decrease

Productivity

More productivity= Lower unit production cost Less productivity= Higher unit production cost

Legal-Institution Environment (Taxes and Subsidies)

Taxes increase= SRAS increase Taxes decrease= SRAS decrease

Legal-Institution Environment (Government Regulation)

Government regulation= Decrease in SRAS Deregulation= Increase in SRAS

3 Reasons AD is Downward Sloping

Real Balances Effect, Interest Rate Effect, Foreign Purchase Effect

Real Balances Effect

When the price level is high, households and business cannot afford to purchase as much output

Interest Rate Effect

A higher price level increases the interest rate which tends to discourage investment

Foreign Purchases Effect

A higher price level increases the demand for relatively cheaper imports

Key to Understanding SRAS Shifts

Per Unit Cost of Production (Total input cost/ Total output cost )