AP Macroeconomics Unit 3 Key Terms

Aggregate Demand (Curve)

The total demand for goods and services in a particular market.

Real Wealth Effect

When people feel wealthier, they spend more money, which increases the flow of money in the economy

Interest Rate Effect

The change in borrowing and spending that happens when interest rates change, when it rises people borrow less, and vice versa.

Exchange Rate Effect

Changes in prices and economic activity that occur when exchange rates fluctuate with the currency. (If your money is worth more somewhere people are more liekly to go there and transfer their money)

Expenditure Multiplier

Ratio of change in money (1/MPS)

Tax Multipier

(MPC)/1-(MPC)

Marginal propensity to consume

Proportion of disposable income that is spent versus being saved (DI = MPS - MPC)

Marginal propensity to save

Proportion of disposable income that is saved versus being spent (DI = MPS - MPC)

Short Run Aggregate Supply (SRAS)

Relationship between the Aggregate supply and the Aggregate demand, often falls victim to shocks.

Equilibrium price level

Point where SRAS, AD, and Yf intersect, shows position in which the economy is stable and at full employment/efficiency

Equilibrium real output

Level of GDP where SRAS is equal to AD, no excess supply or demand

Sticky wages

When wages of workers stagnate and do not change with inflating economy, can make labor cheaper

Long-run Aggregate supply

Maximum amount of goods and services an economy can produce when all goods and services are used

Recessionary gap

When an economy is less than fully employed, if the base of the triangle is on the right

Inflationary gap

When an economy is more than fully employed, if the base of the triangle is on the left

Positive vs. Negative Supply Shock

Sudden increases or decreases in SRAS

Demand-pull vs. Cost-push inflation

When AD shifts vs. When SRAS shifts and causes inflation

Discretionary fiscal policy

Fiscal policy that is decided upon by the government

Automatic stabilizers

Automatic shifts in certain things that stabilize the economy (like automatic shifts in tax rates)

Government transfers

Payment of money by the government where no goods are expected in return (Unemployment money)

Expansionary vs. Contractionary policy

Increasing Gov spending and lowering taxes vs. Decreasing Gov spending and raising taxes

Stagflation

inflation increases while economic growth decreases