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48 Cards in this Set
- Front
- Back
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marginal propensity to consume (MPC) |
the increase in consumer spending when disposable income rises by $1 |
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MPC formula |
MPC = change in consumer spending/change in disposable income |
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marginal propensity to save (MPS) |
fraction of an additional dollar of disposable income that is saved |
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MPS formula |
MPS = 1-MPC |
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autonomous change in aggregate spending (AAS) |
initial rise or fall in aggregate spending at a given level of real GDP; "self-governing" because its the cause |
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multiplier |
ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change |
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multiplier formula |
1/MPS |
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consumption function |
c = a + MPC * Yd (a = the amount a household would spend if it had no disposable income) |
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slope of consumption function is... |
MPC |
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permanent income hypothesis |
consumer spending ultimately depends mainly on the income people expect to have over the long term rather than on their current income |
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life-cycle hypothesis |
consumers plan their spending over their lifetime, not just in response to their current Yd |
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planned investment spending |
investment spending that firms intend to undertake during a given period |
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what does planned investment spending depend on? |
interest rate, expected future level of real GDP, current level of production capacity |
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inventories |
stocks of goods held to satisfy future sales |
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inventory investment |
value of the change in total inventories held in the economy during a given period (can actually be negative) |
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unplanned inventory investment |
when a firm's inventories are higher than intended due to an unforeseen decrease in sales |
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actual investment spending |
planned investment spending plus unplanned inventory investment |
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aggregate demand curve |
shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, firms, the government, and rest of world |
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reasons for downward sloping AD curve |
1. wealth effect: change in the consumer spending caused by the altered purchasing power of consumers' assets 2. interest rate effect: rise in the aggregate price level depresses I and C |
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shifts of the aggregate demand curve |
1. changes in expectations 2. changes in wealth 3. size of the existing stock of physical capital
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influence AD too |
1. fiscal policy: gov spending/transfers, tax policies 2. Monetary policy: use of changes in the quantity of money or interest rate to stabilize economy |
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aggregate supply curve |
shows the relationship between the economy's aggregate price level and the total quantity of final goods and services producers are willing to supply |
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short-run aggregate supply curve |
short-run relation between real production and the price level |
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profit per unit of output = |
price per unit of output - production cost per unit of output |
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nominal wage |
dollar amount of any given wage paid |
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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 |
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shifts of the short-run aggregate |
1. changes in commodity prices 2. changes in nominal wages 3. changes in productivity |
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Long run aggregate supply curve (LRAS) |
shows aggregate price level and quantity of aggregate supply output if all prices (wages) were fully flexible |
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short-run macroeconomics equilibrium (ESR) |
the point at which the quantity of aggregate output supplied is equal to the quantity demanded by domestic households, businesses, government, and the rest of the world |
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short-run equilibrium aggregate price level |
aggregate price level at ESR |
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short-run equilibrium aggregate output |
aggregate output level at ESR |
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demand shock |
event that shifts the aggregate demand curve |
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supply shock |
event that shifts the short-run aggregate supply curve |
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historical example of negative demand shock |
Great Depression |
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historical example of positive demand shock |
WWII |
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historical example of negative supply shock |
Oil crisis of 1979 |
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historical example of positive demand shock |
.com boom in the 1990s-2000s |
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result of negative supply shock |
stagflation: inflation with stagnant growth; leftward shift of SRAS curve causing the APL to increase and real GDP |
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long-run macroeconomic equilibrium |
the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve |
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output gap |
(actual aggregate output - potential output)/potential output x 100 |
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Keynesian economics |
view that in the short run, especially during recessions, economic output is strongly influenced by aggregate demand |
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stabilization policy |
the use of government policy to reduce the severity of recessions and rein in excessively strong expansions |
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makes up fiscal policy |
government spending, transfers, and taxes |
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expansionary fiscal policy |
- increase in gov spending - cut in taxes - increase in gov transfers |
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contractionary fiscal policy |
- decrease in gov spending - increase in taxes - increase in gov transfers |
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lags in fiscal policy |
- recognition lag: takes time for the gov to even realize that the gap exists due to time collecting data - decision lag: takes time to get a plan together - implementation lag: takes time to spend money |
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lump-sum taxes |
the amount of tax a household owes is independent of its income |
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discretionary fiscal policy |
fiscal policy that is the direct result of deliberate actions by policy makers rather than automatic adjustment |
