Unit 3 Terms

Question 1

Wealth

Answer 1

The value of a household’s accumulated savings

Question 2

Inventory Investment

Answer 2

The value of the change in inventories held in the economy during a given period

Question 3

Aggregate Demand Curve

Answer 3

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.

Question 4

The Real Wealth Effect

Answer 4

The change in consumer spending caused by the altered purchasing power of consumers’ assets

Question 5

The Interest Effect

Answer 5

The change in investment and consumer spending caused by altered interest rates that result from changes in the demand for money.

Question 6

The Exchange Rate Effect

Answer 6

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

Question 7

Marginal Propensity to Consume

Answer 7

The increase in consumer spending when disposable income rises by $1.

Question 8

Marginal Propensity to Save

Answer 8

The increase in household savings when disposable income rises by $1.

Question 9

Expenditure Multiplier

Answer 9

The ratio of total change in RGDP caused by an autonomous change in aggregate spending to the size of that autonomous change; indicates the total rise in RGDP that results from each $1 of an initial rise in spending.

Question 10

Nominal Wage

Answer 10

The dollar amount of the wage paid.

Question 10

Tax Multiplier

Answer 10

The factor by which a change in tax collections changes real GDP.

Question 11

Aggregate Supply Curve

Answer 11

Shows the relationship between the aggreagate price level and the quantity of aggregate output supplied in the economy.

Question 12

Sticky Wages

Answer 12

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.

Question 13

Short-Run Aggregate Supply Curve

Answer 13

Shows the positive relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed.

Question 14

Commodity Prices

Answer 14

The fluctuating values of goods such as natural resources in the market.

Question 15

Long-run Aggregate Curve

Answer 15

Shows the relationship between aggregate price level and the quantity of aggregate output that would exist if all prices were fully flexible.

Question 16

Potential Output

Answer 16

What an economy can produce when operating at maximum sustainable employment, with fully flexible price; maximum sustainable production capacity.

Question 16

Output Gap

Answer 16

Percentage difference between actual aggregate output and potential output.

Question 17

Demand Shock

Answer 17

An event that shifts the aggregate demand curve.

Question 18

Stagflation

Answer 18

The combination of inflation and stagnating (or falling) potential output.

Question 19

Demand-pull Inflation

Answer 19

Inflation caused by an increase in aggregate demand.

Question 20

Cost-push inflation

Answer 20

Inflation caused by a significant increase in the price of an input with economy-wide importance.

Question 21

Fiscal Policy

Answer 21

The use of government purchases of goods and services, government transfers, or tax policy to stabilize the economy.

Question 22

Balanced Budget Multiplier

Answer 22

The factor by which a change in both spending and taxes changes real GDP.

Question 23

Automatic Stabilizers

Answer 23

Government spending and taxation rules that cause fiscal policy to be automatically expansionary, and contractionary when needed.