AP Macro Unit 3 Guide

Depreciate

Diminish in value over a period of time.

Real

Adjusted for inflation.

Aggregate Demand

The amount of a nation’s output (real GDP) that consumers desire to buy at certain price levels.

Inverse Relationship

The relationship between the price index and real GDP is negative; as price levels increase, real GDP demanded decreases.

Income Effect

When the price of an item falls, a consumer’s nominal income allows for a larger purchase of that item.

Substitution Effect

As the price of a good falls, consumers prefer to buy more of that good compared to higher-priced substitutes.

Real-Balances Effect

A higher price level reduces the purchasing power of the public’s accumulated savings.

Interest-Rate Effect

A higher price level increases the demand for money, leading to higher interest rates.

Foreign-Purchases Effect

When the US price level rises, foreigners buy less US goods and Americans buy more foreign goods.

Real Wealth Effect

When consumer income increases, consumers save less and spend more, leading to increased consumer spending.

Exchange Rate Effect

An increase in a country’s exchange rate decreases net exports and aggregate expenditure.

SRAS

Short-Run Aggregate Supply.

Aggregate Output

An increase in real GDP is accompanied by a change in employment.

Aggregate Spending

Includes consumption, government spending, net exports, and gross private investment.

Aggregate Income

Comprises wages, rent, interest, and profit.

Aggregate Price Level

Measured by the GDP deflator and indicates inflation.

Product Markets

The marketplace where all final goods and services are sold to households and the foreign sector.

Aggregate Demand Components

C (Consumption), I (Investments), G (Government Spending), Xn (Net Exports).

Aggregate Demand Curve

Describes the relationship between the price level and the quantity of goods and services demanded.

Negative Slope of AD Curve

Explained by the wealth effect, interest-rate effect, and exchange-rate effect.

Aggregate Supply

The relationship between a nation’s price level and the real domestic output firms produce.

Immediate Short Run

Input and output prices are fixed.

Short Run

Input prices are fixed, but output prices are flexible.

SRAS Curve

Describes the relationship between the price level and the quantity of goods and services supplied in an economy.

Upward Sloping SRAS Curve

Due to sticky wages and prices.

Long-Run Aggregate Supply

Input and output prices are flexible.

LRAS Curve

Corresponds to the PPC and represents full production ability.

Maximum Sustainable Capacity

Total output an economic system will produce if all resources are fully utilized.

Shift in AD Curve

Caused by changes in components of aggregate demand, leading to left/up or right/down shifts.

Short-Run Tradeoff

Between inflation and unemployment due to the relationship between price level and output.