BOLDED TERMS ONLY - Unit 3 - National Income & Price Determination - AP Macroeconomics

AD-AS Model

AD-AS Model

Used to analyze how changes in aggregate demand and aggregate supply affect overall price levels and real GDP.

Aggregate Demand (AD)

The total amount of goods and services demanded by households, businesses, government, and foreign buyers within an economy.

Disposable Income (Y_D)

The income a consumer has left over to spend or save once they have paid out their net taxes.

Marginal Propensity to Consume (MPC)

The change in consumption caused by a change in disposable income (Y_D).

Marginal Propensity to Save (MPS)

The change in saving caused by a change in disposable income (Y_D)

Expenditure Multiplier

Effect of autonomous spending changes.

Tax Multiplier

How much people will not spend if taxes increase.

Short-Run Aggregate Supply (SRAS)

Represents the total amount of goods and services that firms are willing to produce and sell at different price levels in the short run.

Long-Run Aggregate Supply (LRAS)

The number of goods and services that an economy is capable of producing with the full employment of resources

Full-Employment level of Output

The level of real GDP where all available resources in an economy are being used efficiently, resulting in zero cyclical unemployment.

Short-run Equilibrium price level

Where demand equals supply, leading to stable production levels.

Short-run Equilibrium output level

The economic output when AD is equal to AS in the short-run.

Recessionary Gap

High unemployment & low prices

Actual Output < Potential Output

Inflationary Gap

Low unemployment & high prices

Actual Output > Potential Output

Demand-Pull Inflation

More consumption leads to an increase in price level and real GDP.

Cost-Push Inflation

Happens when production is decreased (or input costs increased, thus decreasing the amount of production).

Fiscal Policy

The government’s use of taxing and spending.

Expansionary Fiscal Policy

The government aims at raising AD, therefore government spending increases AND OR taxes decrease.

Contractionary Fiscal Policy

The government aims at lowering AD, therefore government spending decreases AND OR taxes increase.

Long-Run macroeconomics equilibrium

Maximum sustainable output with stable prices & employment