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AP Economics > Aggregate Demand and Supply > Flashcards

Aggregate Demand and Supply Flashcards

1
Q

multiplier effect

A

when change in spending leads to a much larger change in real GDP

EX: gov spends $100
real GDP increases $400

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2
Q

change in autonomous spending

A

changes in spending that happens in response to something BESIDES increase in income

NOT HAPPENING because INCREASE IN INCOME

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3
Q

Marginal propensity to consume (MPC)

A

proportion of any additional ** income that is spent

the money you spend

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4
Q

marginal propensity to save (MPS)

A

the proportion of any additional income that is saved

MPC + MPS = 1

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5
Q

expenditure multiplier

A

the magnitude of how much real GDP will change in response to an autonomous change in aggregate spending

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6
Q

tax multiplier

A

ratio of the total change in real GDP caused by a change in taxes

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7
Q

MPC equation

A

MPC = (change in spending)/(change in income)

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8
Q

MPS equation

A

MPS = 1 - MPC

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9
Q

Expenditure multiplier (and equation)

A

used to find a number that represents HOW BIG of a change in AD will occur in result of a change in a AD component

= 1 / (1-MPC)

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10
Q

Tax multiplier

A

= (-MPC)/(MPS)

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11
Q

And equation that gives the

final impact on GDP

A

= multiplier x autonomous change

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12
Q

A price change in a component of AD will result…

A

in a larger price change in AD than originally due to the MULTIPLIER EFFECT

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13
Q

short run aggregate supply (SRAS)

A

a graph that shows the positive relationship between aggregate price level and amount of aggregate supplied in an economy

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14
Q

short-run

A

a period in which the price of at least ONE FACTOR OF PRODUCTION cannot change

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15
Q

sticky prices/wages

A

the idea that some prices and wages are not fully flexible and cannot completely respond to changes such as inflation or deflation

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16
Q

menu costs

A

a IDEA that firms might not change their prices when there is a change in the price level because it is costly to do so

one of the reasons prices are “sticky” in the economy

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17
Q

determinants of SRAS (2)

A

prices of any factors of production change

firms expect prices to change

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18
Q

aggregate supply shock

A

when the SRAS curve shifts

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19
Q

shocks that shift SRAS (5)

A

Subsides for business **
Productivity
Input prices
Taxes on businesses
Expectations about inflation

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20
Q

SHORT RUN AGGREGATE SUPPLY

What happens when there is a shift to the right of the SRAS curve

A

inflation increases
output increases

increase in output means that there is a DECREASE in unemployment

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21
Q

What is a relationship that is illustrated in the short-run aggregate supply (SRAS) curve

A

Explicitly shows the positive relationship between the price level and output

price level increases
output increases

output increases
unemployment decreases

TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT

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22
Q

long-run

A

a sufficient period of time for nominal wages and other input prices to change in response to a change in price level **

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23
Q

long-run aggregate supply (LRAS)

A

a curve that shows the relationship between price level and real GDP that would be supplied if all prices, including nominal wages, were fully flexible

Price can change along LRAS
BUT OUTPUT CANNOT

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24
Q

full employment output (potential output)

A

the amount of real GDP that an economy WOULD produce if it is using all of its factors of production

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25
what does LRAS represent in terms of the PPC?
LRAS represents a point on the PPC, but it is translated as a vertical line in the AD-AS model
26
Why is LRAS vertical
the price level has nothing to do with how much an economy can produce nominal wages eventually adjust to changes in the price level**
27
The differences between short-run aggregate supply and long-run aggregate supply?
There is a trade-off between inflation and unemployment in the SRAS curve while LRAS does not SRAS: wages are fixed LRAS: wages are fully flexible **
28
Aggregate supply
total quantity of output firms will produce and sell real GDP
29
Aggregate demand
amount of total spending on domestic goods/services in an economy
30
AD-AS model
graph used to understand economic fluctuations includes: AD (aggregate demand), SRAS (short-run aggregate supply) LRAS (long-run aggregate supply)
31
short-run macroe. equilibrium
quantity of aggregate output supplied is equal to the quantity of aggregate output demanded
32
recessionary gap
when the current output is LESS than potential output
33
long-run macroecon. equilibrium
when the output is equal to potential output
34
what describes a short-run equilibrium that is NOT also a long-run equilibrium
output and price level which intersects AD and SRAS
35
to what direction is the LRAS of the full employment output when economy has a positive output gap
to the left of the full employment output
36
what determines real GDP in the AD-AS model
short-run equilibrium
37
shock
unexpected change that will shift either AD or SRAS curve has to be unexpected to cause a change
38
supply shock
an unexpected change that shifts SRAS positive supply shock INCREASES SRAS negative supply shock DECREASES SRAS
39
demand shock
an unexpected change that shifts AD positive demand shock INCREASES AD negative demand shock DECREASES AD
40
stagflation
combination of a stagnating (falling) aggregate output and a higher price level (inflation) STAGFLATION OCCURS when SRAS decreases
41
Positive Demand Shock will impact rGDP impact on unemployment impact on price level
real GDP will go UP unemployment rate will go DOWN price levels GO UP
42
Negative Demand Shock will impact rGDP impact on unemployment impact on price level
real GDP will go DOWN unemployment rate will go UP price levels will GO DOWN
43
change in what components CAUSES AD to shift? how?
C I G Net Exports anything increasing of the above will cause a SHIFT TO THE RIGHT anything decreasing of the above will cause a SHIFT TO THE LEFT
44
Negative Supply Shock will impact rGDP impact on unemployment impact on price level
real GDP will go DOWN unemployment rate will go UP price levels will GO UP
45
Positive Supply Shock will impact rGDP impact on unemployment impact on price level
real GDP will go UP (lower inflation) unemployment rate will go DOWN price levels GO DOWN **
46
SPITE is?
what causes a shift in SRAS Subsidies for businesses Productivity Input prices Taxes on businesses Expectations about future inflation
47
What happens to SRAS when GDP deflator increases
when GDP deflator increases --> inflation Inflation happens when SRAS decreases --> decrease in real GDP
48
long-run self-adjustment
process through an economy will return to full employment output (no gov intervention)
49
economic growth
an increase in an economy s ability to produce goods/services
50
where is economic growth represented in AD-AS model
an increase in LRAS represents economic growth (shifting to the right)
51
stabilization policy
use of policy - expansionary or monetary to REDUCE the SEVERITY of recessions and excessively strong expansions goal is to smooth out the business cycle
52
fiscal policy
using taxes, give spending, gov transfers to STABILIZE an economy
53
discretionary fiscal policy
fiscal policy that NEEDS an action from the government government passes a law **
54
monetary policy
using changes in money supply or interest rate to affect key macro economical variables ** *policy of the central banks*
55
lump-sum taxes
taxes that do not depend on taxpayer income
56
expansionary fiscal policy
using fiscal policy to expand economy by INCREASING aggregate demand FIXES RECESSIONS
57
what happens when expansionary fiscal policy takes place? (3)
leading to.... increased output decreased unemployment higher price level FIXES RECESSIONS
58
contractionary fiscal policy
using fiscal policy to DECREASE aggregate demand fix BOOMS
59
what does the contractionary fiscal policy lead to
leads to... lower output higher unemployment lower price lever fix BOOMS
60
lag
**
61
data lag**
62
recognition lag**
63
decision lag **
64
implementation lag **
65
deficit
when expenditures exceeds income
66
debt
accumulated deficits over time
67
balance budget multiplier
spending multiplier will exist when any change in gov spending is offset entirely by an equal change in taxes **
68
What does the balanced budged multiplier equal?
1
69
The four lags that complicate fiscal policy (in the real world) **
Data lag Recognition lag Decision lag Implementation lag
70
What is the tax change need equation
tax change needed = (size of gap to close)/(tax multiplier)
71
What is the spending need equation
(size of gap to close)/(gov spending multiplier)
72
define crowding out
73
How does government spending and taxes affect Aggregate Demand
Gov Spending DIRECTLY affects AD Taxes INDIRECTLY affects AD
74

AP Economics (5 decks)

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