Macro Economics - Aggregate Demand and Supply

A set of vocabulary flashcards based on key concepts from macro economics lectures covering aggregate demand and supply, fiscal and monetary policies, and economic theories.

Aggregate Demand

The amount of a nation’s output (real GDP) that buyers will purchase at each different price level.

Real Wealth Effect

Wealth/accumulated savings that lose purchasing power at high prices. Buyers end up demanding less.

Interest Rate Effect

As prices rise, interest rates tend to rise, discouraging borrowing by households and firms.

Exchange Rate or Foreign Trade Effect

As prices of domestic goods rise, consumers will demand more imports and less domestic products.

Fiscal Policy

Taxing and spending by government to influence the economy.

Monetary Policy

Changes in a country’s money supply that affect interest rates.

Multiplier Effect

A change in components of autonomous spending that leads to a larger change in GDP.

Balanced Budget Multiplier

Always equal to 1, indicating that if the government wants to increase spending without going into deficit, they must increase taxes as well.

Autonomous Expenditures

Independent expenditures that do not depend on the level of income.

Propensity

Willingness to consume, often expressed as the marginal propensity to consume (MPC).

Marginal Propensity to Consume (MPC)

The change in consumption resulting from a change in disposable income.

Marginal Propensity to Save (MPS)

The change in savings resulting from a change in disposable income.

Spending Multiplier

1/(1-MPC), which shows how an initial change in spending leads to a larger change in GDP.

Tax Multiplier

• (MPC/(1-MPC)), reflecting the negative effect of tax changes on aggregate demand.

Short-Run Aggregate Supply (SRAS)

Upward sloping curve reflecting the relationship between price levels and the amount of output that firms produce in the short run.

Long-Run Aggregate Supply (LRAS)

Vertical curve that reflects the full employment output level of the economy when all resources are fully employed.

Phillips Curve

The relationship between inflation and unemployment that suggests a trade-off exists.

Goldilocks Problem

A situation where there is a trade-off between inflation and employment.

Inflationary Gap

Occurs when actual output exceeds potential output, leading to unemployment lower than the natural rate.

Recessionary Gap

Occurs when actual output is less than potential output, leading to unemployment higher than the natural rate.

Cost-Push Inflation

Inflation caused by an increase in the cost of production, leading to decreased real GDP and increased unemployment.

Demand-Pull Inflation

Inflation caused by an increase in aggregate demand, leading to higher prices.

Full Employment Equilibrium

Condition when the unemployment rate equals the natural rate of unemployment.

Recognition Lag

The time between the start of a recession or inflation and the certainty that it is occurring.

Policy Lag

The time between recognizing a problem and enacting a suitable fiscal policy response.

Operational Lag

The time between enacting fiscal policy and when it begins to affect the economy.

Automatic Stabilizers

Fiscal mechanisms that automatically adjust government spending and taxes to stabilize the economy.

Proportional Tax

Tax rate that is the same for all levels of income or profits.

Progressive Tax

Tax rate that increases as the level of income or profits increases.

Regressive Tax

Tax rate that decreases as the level of income or profits increases.

Real GDP

The measure of a country's production of goods and services adjusted for inflation.

Sticky Wages

Wages that do not readily adjust to changes in economic conditions.

Supply Shock

An unexpected event that causes a sudden change in the supply of a product or service.

Economic Goals

Objectives set by the government or policymakers to ensure economic stability and growth.

Circular Flow Model

A diagram that shows the flow of goods and services in an economy, illustrating interactions between different sectors.

Aggregate Output

The total quantity of goods and services produced in an economy at a given overall price level.

Input Prices

The prices of factors of production that firms use to create goods and services.

Aggregate Supply

Relationship between nation’s PL and the amount of domestic output firms in economy produce (RDGP)