AP Macroeconomics Unit 3

Aggregate Demand

Total demand for all final goods and services that buyers are willing and able to purchase at different price points.

What is the relationship between price level and real GDP?

Inverse

Wealth Effect

What happens when a change in the price level leads to a change in consumer spending

Price level decreases, purchasing power…

Increases

Interest Rate Effect

What occurs when a change in the price level leads to a change in interest rates and interest sensitive spending

Price level decreases, interest rates… and consumption…

Decrease, increase

Net Export Effect

When a change in the price level in one country leads to other countries purchasing more of that country’s goods.

Price level in Country A increases, exports... and GDP…

Decrease, decrease

Multiplier Effect

When a change in spending leads to a much larger change in RGDP

Marginal Propensity to Consume (MPC)

Proportion of an additional income that households spend on consumption rather than save.

Marginal Propensity to Save

Proportion of any additional income that is saved

MPC + MPS = …

1

Spending Multiplier Formula

1/(1-MPC) or 1/MPS

Change in RGDP Formula

Spending multiplier * change in spending, investment, taxes, or transfer payments

Short-Run Aggregate Supply (SRAS)

Direct, positive relationship between the aggregate price level and RGDP

Sticky Prices

Some prices and wages do NOT increase as price levels increase

In SRAS, prices/wages… as price levels increase

Do not increase

Shifters of SRAS

Resource prices, government action, productivity

Long-Run Aggregate Supply (LRAS)

Price and wages are flexible, but output cannot because it is at full employment

Full Employment Output

Amount of RGDP that an economy would produce if it is using all of its factors of production efficiently

Graph of LRAS is…

Vertical