FLVS Module 3 Vocab Flashcards
Classical economics
Theory advocated by Adam Smith stating that the government should not interfere in the operation of the economy
Say’s Law
Concept that “supply creates its own demand” advanced by John-Baptiste Say in early 1800s
Short run aggregate supply
The total amount of goods and services that all firms are willing and able to produce within the economy
Long run aggregate supply
A time period When all production factors have time to adjust to full employment; this curve is vertical at the natural rate of employment
Aggregate demand
The total amount of goods and services consumers are willing and able to buy in the economy
Net export effect
As interest rates in the US fall, investors tend to put more money into foreign investments. This drives foreign prices up and lowers US prices, which then leads to a better exchange rate. When American made goods are cheaper compared to foreign goods, more goods are exported and imported, leading to a better net export rate.
Interest rate effect
As price levels rise, consumers’ demand for money increases. This causes interest rates (which are the price of money) to rise. Higher interest rates cause investment and other interest sensitive components of aggregate demand to decrease.
Wealth effect
When prices rise in an economy, the real value of household income declines, and so consumer spending drops. This drop results in a decrease in real GDP. If Price levels drop, the value of money and other financial assets is higher, and consumers will spend more.
Marginal Propensity to Consume (MPC)
How much of every extra dollar would be consumed
Marginal Propensity to Save (MPS)
How much of every extra dollar would be saved
Expenditure Multiplier
Aids in calculating the change in GDP when expenditures change
Tax Multiplier
Aids in calculating the change in GDP when taxes change
Equilibrium
When aggregate demand is equal to aggregate supply in an economy
