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Chapter 12: National Income and Price Determination

12.1 Aggregate Demand

  • Aggregate demand: total demand for goods and services

  • Inverse relationship between price and GDP

    • Caused by:

      • The Real Wealth Effect

      • The Foreign Trade Effect

      • The Interest Rate Effect

12.2 Short-run and Long-run Aggregate Supply

  • Aggregate supply (AS): curve shows total value of output produces are willing + able to supply at different price levels during a certain time

  • Aggregate demand (AD): total demand of goods/services

  • Price level: average level for all prices

  • Long-run aggregate supply curve (LAS): stands at level of output that corresponds with full employment

12.3 Equilibrium and Changes in the Aggregate Demand-Aggregate Supply Model

  • Cost-push (supply inflation): when inflation is due to increase in resource costs (shifts AS curve to left)

  • Stagflation: rising prices and falling output

  • Demand pull inflation: result of AD curve shifting out to the right relative to AS curve

  • Creeping inflation: inflation at a low rate that remains teady for a long period of time

  • Galloping inflation: unsteady inflation that exceeds 10% per year and grows monthly

  • Hyperinflation: rapid price incrase greater than 50% per year

  • Inflationary gap: amount the equilibrium real GDP would need to increase to reach the LAS

  • Spending multiplier: number the initial amount of new spending needs to be multiplied by to find total resulting increase in real GDP

  • Marginal propensity to consume (MPC): amount consumption increases for every dollar of real income

  • Marginal propensity to save (MPS): fraction of each dollar of income that is saved

  • Spending multiplier (expenditure multiplier)

12.4 Fiscal Policy

  • Fiscal policy: when government tries to counteract fluctuations in aggregate expenditure by changing purchases, transfer payment, taxes

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Chapter 12: National Income and Price Determination

12.1 Aggregate Demand

  • Aggregate demand: total demand for goods and services

  • Inverse relationship between price and GDP

    • Caused by:

      • The Real Wealth Effect

      • The Foreign Trade Effect

      • The Interest Rate Effect

12.2 Short-run and Long-run Aggregate Supply

  • Aggregate supply (AS): curve shows total value of output produces are willing + able to supply at different price levels during a certain time

  • Aggregate demand (AD): total demand of goods/services

  • Price level: average level for all prices

  • Long-run aggregate supply curve (LAS): stands at level of output that corresponds with full employment

12.3 Equilibrium and Changes in the Aggregate Demand-Aggregate Supply Model

  • Cost-push (supply inflation): when inflation is due to increase in resource costs (shifts AS curve to left)

  • Stagflation: rising prices and falling output

  • Demand pull inflation: result of AD curve shifting out to the right relative to AS curve

  • Creeping inflation: inflation at a low rate that remains teady for a long period of time

  • Galloping inflation: unsteady inflation that exceeds 10% per year and grows monthly

  • Hyperinflation: rapid price incrase greater than 50% per year

  • Inflationary gap: amount the equilibrium real GDP would need to increase to reach the LAS

  • Spending multiplier: number the initial amount of new spending needs to be multiplied by to find total resulting increase in real GDP

  • Marginal propensity to consume (MPC): amount consumption increases for every dollar of real income

  • Marginal propensity to save (MPS): fraction of each dollar of income that is saved

  • Spending multiplier (expenditure multiplier)

12.4 Fiscal Policy

  • Fiscal policy: when government tries to counteract fluctuations in aggregate expenditure by changing purchases, transfer payment, taxes