macro unit 3 vocab

Topic 3.1 - Aggregate Demand (AD)

Term

Definition

Aggregate demand (AD)

The total spending on goods and services in an economy at different price levels.

Aggregate demand curve

A downward-sloping curve showing the inverse relationship between the price level and real GDP demanded.

Wealth effect

As the price level decreases, the purchasing power of wealth increases, leading to higher consumption and aggregate demand.

Interest rate effect

A lower price level reduces interest rates, encouraging more investment and consumption, increasing aggregate demand.

Appreciate 

When a currency increases in value relative to another currency, making imports cheaper and exports more expensive.

Depreciate

When a currency decreases in value relative to another currency, making imports more expensive and exports cheaper.

Topic 3.2 - Multipliers

Term

Definition

Multiplier

A factor that determines the overall impact of a change in spending on the economy, amplifying initial changes in expenditures.

Multiplier Effect

The process where an initial increase in spending leads to a larger overall increase in real GDP due to repeated rounds of consumption.

Marginal propensity to consume (MPC)

The fraction of additional income that households spend on consumption. Formula: MPC = ΔC / ΔY.

Marginal propensity to save (MPS)

The fraction of additional income that households save rather than spend. Formula: MPS = ΔS / ΔY

Disposable income

The income available to households after taxes, which can be used for consumption or saving.

Expenditure multiplier

Measures the total change in GDP from an initial change in spending. Formula: 1 / (1 - MPC).

Tax multiplier (TM)

Measures the total change in GDP from a change in taxes. Formula: -MPC / (1 - MPC) (negative because tax increases reduce GDP).

Topic 3.3 - Short-Run Aggregate Supply (SRAS)

Term

Definition

Short run

a period in which at least on input is fixed, and firms can only adjust some variables to respond to economic changes

Long run

a time frame in which all factors of production can be varied, and firms can fully adjust to changes in the economy 

Short-run aggregate supply (SRAS)

The total quantity of goods and services that producers in an economy are willing to supply at different price levels, assuming some input prices are sticky

Short-run aggregate supply curve

The total quantity of goods and services that producers in an economy are willing to supply at different price levels, assuming some input prices are sticky

Profitability

The total quantity of goods and services that producers in an economy are willing to supply at different price levels, assuming some input prices are sticky

Nominal wages

The total quantity of goods and services that producers in an economy are willing to supply at different price levels, assuming some input prices are sticky

Sticky wages

The total quantity of goods and services that producers in an economy are willing to supply at different price levels, assuming some input prices are sticky

Nominal price rigidity

The total quantity of goods and services that producers in an economy are willing to supply at different price levels, assuming some input prices are sticky

Pricing power

The ability of a firm or producer to set prices for goods or services rather than being dictated by market forces.

Topic 3.4 - Long-Run Aggregate Supply (LRAS)

Term

Definition

Long-run aggregate supply (LRAS)

The total quantity of goods and services that an economy can produce when all factors of production are fully employed, assuming the economy is at its potential output.

Long-run aggregate supply curve

The total quantity of goods and services that an economy can produce when all factors of production are fully employed, assuming the economy is at its potential output.

Full-employment output

The level of output where all resources in the economy (labor, capital, etc.) are fully utilized, and the economy is operating at its potential or natural level of output.

Potential output

The maximum sustainable output an economy can produce when it is fully employing its resources, corresponding to full-employment output.

Output gap

The difference between the actual output of an economy and its potential output. A positive gap indicates the economy is producing above potential, while a negative gap shows underproduction relative to potential.

Topic 3.5 - Equilibrium in the AD-AS Model

Term

Definition

Aggregate demand

The total demand for goods and services in an economy at different price levels.

Aggregate supply

The total quantity of goods and services producers are willing to supply at different price levels.

Aggregate demand-aggregate supply model (AD-AS)

A macroeconomic model that shows how aggregate demand and aggregate supply interact to determine price levels and real GDP.

Equilibrium

The point where aggregate demand equals aggregate supply, determining the economy’s price level and output.

Short-run macroeconomic equilibrium

The point where aggregate demand intersects short-run aggregate supply, determining short-run output and price levels.

Short-run equilibrium aggregate price level

The price level at which aggregate demand equals short-run aggregate supply.

Short-run equilibrium aggregate output

The level of real GDP produced when aggregate demand equals short-run aggregate supply.

Long-run macroeconomic equilibrium 

The point where aggregate demand intersects long-run aggregate supply, with the economy operating at full employment.

Output gap

The difference between actual real GDP and potential real GDP, indicating whether the economy is in a recessionary or inflationary gap.

Topic 3.6 - Changes in the AD-AS Model in the Short Run

Term

Definition

Aggregate demand shock

A sudden event that causes a significant shift in aggregate demand, affecting real GDP and price levels.

Positive demand shock

An increase in aggregate demand due to factors like higher consumer confidence or government spending, leading to higher output and price levels.

Negative demand shock

A decrease in aggregate demand due to factors like decreased consumer spending or higher taxes, leading to lower output and price levels.

Negative supply shock

A sudden decrease in aggregate supply, often caused by rising input costs or supply chain disruptions, leading to higher prices and lower output.

Positive supply shock

A sudden increase in aggregate supply, often due to technological improvements or lower production costs, leading to lower prices and higher output.

Stagflation

A situation where the economy experiences high inflation and stagnant economic growth (low output), typically caused by a negative supply shock.