Topic 3.1 – Aggregate Demand

• Wealth: the value of a household’s accumulated savings

• Aggregate Demand Curve: shows the relationship between the aggregate price level and the

quantity of aggregate output demanded by households, businesses, the government, and the

rest of the world.

• Real Wealth Effect: the change in consumer spending caused by the altered purchasing power of

consumers’ assets.

• Interest Rate Effect: the change in investment and consumer spending caused by altered

interest rates that result from changes in the demand for money

• Exchange Rate Effect: the change in net exports caused by a change in the value of the domestic

currency, which leads to a change in the relative price of domestic and foreign goods and

services

Topic 3.2 – Multipliers

• Marginal Propensity to Consume (MPC): the increase in consumer spending when disposable

income rises by $1

• Marginal Propensity to Save (MPS): the increase in household savings when disposable income

rises by $1

• Expenditure Multiplier: the ratio of the total change in real GDP caused by an autonomous

change in aggregate spending to the size of that autonomous change. This indicates the total

rise in real GDP that results from each $1 of an initial rise in spending

• Tax Multiplier: the factor by which a change in tax collections changes real GDP

Topic 3.3 – Short-Run Aggregate Supply

• Aggregate Supply Curve: shows the relationship between the aggregate price level and the

quantity of aggregate output supplied in the economy

• Nominal Wage: the dollar amount of the wage paid

• Sticky Wages: nominal wages that are slow to fall even in the face of high unemployment and

slow to rise even in the face of labor shortages

• Short-Run Aggregate Supply Curve: shows the positive relationship between the aggregate price

level and the quantity of aggregate output supplied that exists in the short-run

Topic 3.4 – Long-Run Aggregate Supply

• The short run: the time period in which many production costs, including nominal wages, are

not fully flexible

• The long run: the time period in which all prices, including wages, are fully flexible

• Long-Run Aggregate Supply Curve: shows the relationship between the aggregate price level and

the quantity of aggregate output supplied that would exist if all prices, including nominal wages,

were fully flexible

• Full-Employment Output: the level of real GDP the economy can produce if all resources are

fully employed

Topics 3.5 and 3.6 – Equilibrium in the AD-AS Model

• Short-Run Macroeconomic Equilibrium: occurs where the quantity of aggregate output supplied

is equal to the quantity of aggregate output demanded- that is, where the AD and SRAS curves

intersect

• Long-Run Macroeconomic Equilibrium: occurs when a short-run macroeconomic equilibrium is

at the full employment level of output (on the LRAS curve)

• Output Gap: the difference between actual output and full employment output

• Demand Shock: an event that shifts the aggregate demand curve

• Supply Shock: an event that shifts the short-run aggregate supply curve

• Stagflation: the combination of inflation and stagnating (or decreasing) aggregate output

Topic 3.7 – LR Self Adjustment

• Long-Run Self Adjustment: the process that brings the economy back to equilibrium after a

supply or demand shock if there is no government policy response.

Topics 3.8 and 3.9 – Fiscal Policy and Automatic Stabilizers

• Fiscal Policy: the use of government purchases of goods and services, government transfers, or

tax policy to stabilize the economy

• Expansionary Fiscal Policy: increases aggregate demand to close a recessionary gap; it involves

the government increasing spending or transfer payments, or decreasing taxes

• Contractionary Fiscal Policy: decreases aggregate demand to close an inflationary gap; it

involves the government decreasing spending or transfer payments, or increasing taxes

• Discretionary Fiscal Policy: fiscal policy that is the result of deliberate actions by policy makers

rather than rules

• Automatic Stabilizers: government spending and taxation rules that cause fiscal policy to

automatically be expansionary when the economy contracts, and automatically contractionary

when the economy expands