Econ 200: Study Guide — Aggregate Demand & Supply

Comprehensive vocabulary flashcards covering Aggregate Demand, Aggregate Supply, and Fiscal Policy from Econ 200 notes.

Aggregate Demand (AD)

The total demand for goods and services in an economy, represented by the formula $\text{AD} = C + I + G + NX$.

Consumption Function

The mathematical relationship between consumer spending and the variables that affect it: $C = C_0 + \text{MPC} \times (Y - T)$.

Autonomous Consumption ($C_0$)

The baseline level of consumer spending that occurs even when total income is zero.

Disposable Income

Total income or total output minus taxes, represented as $(Y - T)$.

Business Spending / Investment ($I$)

Spending on facilities, equipment, and capital goods, which is highly volatile compared to consumer spending.

Government Spending ($G$)

Government purchases that are determined directly by policy choices made by Congress and the President.

Net Exports ($NX$)

The difference between exports and imports, calculated as $NX = Ex - Im$.

Exchange Rates

The relative valuation ratio between currencies, where a stronger dollar leads to a higher trade deficit by making domestic goods more expensive abroad and foreign goods cheaper at home.

Short-Run Aggregate Supply (SRAS)

An upward-sloping curve showing the relationship between total output (GDP) and the price level in the short run, caused by sticky wages and material costs.

Long-Run Aggregate Supply (LRAS)

A vertical line at potential output ($Y^*$) showing the relationship between total output and price level, illustrating that long-run potential output does not depend on the price level.

Potential Output ($Y^*$)

The benchmark level of output in the long run, determined by labor force availability, capital stock, technology level, natural resources, and human capital.

Stagflation

An economic condition caused by a negative supply shock, characterized by the combination of economic stagnation (falling output) and high inflation.

Fiscal Policy

Actions taken by Congress and the President regarding government spending and taxation to achieve macroeconomic goals.

Expansionary Fiscal Policy (Loose Policy)

A policy aimed at stimulating the economy during a downturn by increasing government spending ($G \uparrow$), reducing taxes ($T \downarrow$), or increasing transfer payments.

Contractionary Fiscal Policy

A policy used to slow down an overheating economy by decreasing government spending ($G \downarrow$), raising taxes ($T \uparrow$), or reducing transfer payments.

Fiscal Policy Multipliers

Metrics that measure the total impact that fiscal policy actions have on Aggregate Demand.

Crowding Out Effect

A decline in private spending that results when an increase in government purchases raises interest rates ($G \uparrow \implies \text{Interest Rates} \uparrow \implies C \downarrow \text{ and } I \downarrow$).

Required Tax Refund/Cut Formula

The formula used to calculate the size of a tax cut needed to close a specific output gap: $\text{Required Tax Refund/Cut} = \frac{\text{Output Gap}}{\text{Multiplier}}$.