UNIT 4 VOCABULARY: NATIONAL INCOME AND PRICE DETERMINATION

Question 1

Marginal Propensity to Consume (MPC):

Answer 1

The fraction of each additional dollar of income that a household spends on consumption rather than saving. For example, if MPC is 0.75, it means that for every extra dollar earned, 75 cents is spent on goods and services.

Question 2

Marginal Propensity to Save (MPS):

Answer 2

The fraction of each additional dollar of income that a household saves rather than spends. It is calculated as 1 minus the MPC. If MPC is 0.75, then MPS is 0.25.

Question 3

Autonomous Change in Aggregate Spending:

Answer 3

A change in total spending in the economy that is not caused by changes in income. It might result from factors like changes in government policy, consumer confidence, or investment decisions.

Question 4

Multiplier:

Answer 4

A factor that measures the impact of an initial change in spending on the overall economy. It shows how an increase in spending can lead to a larger increase in national income. For example, if the multiplier is 2, a $100 increase in spending can result in a $200 increase in total output.

Question 5

Consumption Function:

Answer 5

A relationship that shows how total consumer spending changes with changes in disposable income. It represents how much people plan to spend at different levels of income.

Question 6

Autonomous Consumer Spending:

Answer 6

The level of consumption that occurs even when income is zero. It represents basic spending needs that are not influenced by changes in income, such as spending on necessities.

Question 7

Planned Investment Spending:

Answer 7

The amount of money that businesses plan to spend on new capital goods, such as machinery and equipment, over a period of time. It reflects business expectations and investment decisions.

Question 8

Inventories:

Answer 8

The stock of goods that businesses hold for future sales. Inventories include unsold products and raw materials used in production.

Question 9

Inventory Investment:

Answer 9

The change in the value of a firm’s inventories over a period of time. It includes increases or decreases in the stock of goods that businesses have.

Question 10

Unplanned Inventory Investment:

Answer 10

The change in inventory levels occurs when actual sales differ from what businesses expected. For example, if sales are lower than anticipated, unsold goods will increase, leading to unplanned inventory investment.

Question 11

Actual Investment Spending:

Answer 11

The total amount of money spent by businesses on capital goods and changes in inventories during a specific period. It includes both planned investment and any unplanned inventory changes.

Question 12

Aggregate Demand Curve:

Answer 12

A graph that shows the total quantity of goods and services that all consumers, businesses, and the government in an economy are willing to buy at different price levels. It typically slopes downward, indicating that as the aggregate price level falls, the quantity demanded increases.

Question 13

Wealth Effect of a Change in the Aggregate Price Level:

Answer 13

The impact on consumer spending that occurs when changes in the aggregate price level affect the real value of household wealth. When the price level falls (deflation), the real value of wealth increases, leading to higher consumer spending. Conversely, when the price level rises (inflation), the real value of wealth decreases, leading to lower consumer spending.

Question 14

Interest Rate Effect of a Change in the Aggregate Price Level:

Answer 14

The effect on spending and investment that occurs due to changes in interest rates as a result of changes in the aggregate price level. When the price level rises, people need more money for transactions, which can increase interest rates. Higher interest rates make borrowing more expensive, reducing investment and spending. When the price level falls, interest rates may decrease, encouraging more borrowing and spending.

Question 15

Fiscal Policy:

Answer 15

Government actions related to taxation and spending designed to influence the overall economy. Fiscal policy can be used to manage economic growth, control inflation, and reduce unemployment. For example, increasing government spending or cutting taxes can boost aggregate demand, while reducing spending or increasing taxes can slow it down.

Question 16

Monetary Policy:

Answer 16

Actions taken by a central bank (such as the Federal Reserve in the U.S.) to control the money supply and interest rates to influence economic activity. Monetary policy can affect aggregate demand by changing interest rates or by altering the amount of money circulating in the economy. For instance, lowering interest rates can encourage borrowing and spending, while raising rates can help control inflation.

Question 17

Aggregate Supply Curve:

Answer 17

A graph showing the total quantity of goods and services that firms in an economy are willing to produce and sell at different price levels. The curve typically has different slopes in the short run and the long run.

Question 18

Nominal Wage:

Answer 18

The amount of money paid to workers in current dollars, not adjusted for inflation. It represents the actual paycheck received by workers, but it does not account for changes in the purchasing power of money.

Question 19

Sticky Wages:

Answer 19

The concept that wages do not adjust quickly to changes in the economy or the aggregate price level. Sticky wages can cause temporary imbalances in the labor market, as wages may be slow to decrease during economic downturns or increase during booms.

Question 20

Short-Run Aggregate Supply Curve:

Answer 20

The portion of the aggregate supply curve that shows the relationship between the aggregate price level and the quantity of goods and services that firms are willing to produce and sell in the short run. In the short run, the curve typically slopes upward because some production costs, like wages, are sticky.

Question 21

Long-Run Aggregate Supply Curve:

Answer 21

The portion of the aggregate supply curve that shows the relationship between the aggregate price level and the quantity of goods and services that firms are willing to produce and sell when all production costs, including wages, have fully adjusted. In the long run, the aggregate supply curve is vertical, indicating that the economy’s output is determined by factors like technology and resources, rather than the price level.

Question 22

Potential Output:

Answer 22

The level of output (or GDP) that an economy can produce when operating at full capacity and when all resources (labor, capital, etc.) are used efficiently. It represents the maximum sustainable output level without causing inflationary pressure. It is often associated with the long-run aggregate supply curve.

Question 23

AD/AS Model:

Answer 23

A framework used to analyze the overall economy by showing the interaction between Aggregate Demand (AD) and Aggregate Supply (AS). It helps to understand how changes in the overall price level and output affect the economy.

Question 24

Short-Run Macroeconomic Equilibrium:

Answer 24

The situation where the quantity of goods and services demanded equals the quantity of goods and services supplied in the short run. This equilibrium is found where the Aggregate Demand curve intersects the Short-Run Aggregate Supply curve.

Question 25

Short-Run Equilibrium Aggregate Price Level:

Answer 25

The price level at which the quantity of goods and services demanded equals the quantity of goods and services supplied in the short run. It is the price level where the AD curve intersects the Short-Run Aggregate Supply curve.

Question 26

Short-Run Equilibrium Aggregate Output:

Answer 26

The total amount of goods and services produced and consumed in the economy at the short-run equilibrium price level. It is the level of output where the AD and Short-Run Aggregate Supply curves intersect.

Question 27

Demand Shock:

Answer 27

An unexpected event that causes a sudden increase or decrease in the demand for goods and services. Positive demand shocks shift the Aggregate Demand curve to the right, while negative demand shocks shift it to the left.

Question 28

Supply Shock:

Answer 28

An unexpected event that causes a sudden change in the supply of goods and services. Positive supply shocks (e.g., a technological breakthrough) shift the Short-Run Aggregate Supply curve to the right, while negative supply shocks (e.g., natural disasters) shift it to the left.

Question 29

Stagflation:

Answer 29

A situation where an economy experiences stagnant growth, high unemployment, and high inflation simultaneously. It often results from negative supply shocks that reduce output while increasing prices.

Question 30

Long-Run Macroeconomic Equilibrium:

Answer 30

The situation where the quantity of goods and services demanded equals the quantity of goods and services supplied in the long run, and the economy operates at its potential output. This equilibrium is found where the Aggregate Demand curve intersects the Long-Run Aggregate Supply curve.

Question 31

Recessionary Gap:

Answer 31

The amount by which actual output (real GDP) falls short of potential output (the level of output at full employment). It occurs when the economy is producing below its potential, leading to higher unemployment.

Question 32

Inflationary Gap:

Answer 32

The amount by which actual output (real GDP) exceeds potential output. It occurs when the economy is producing above its potential, leading to upward pressure on prices and inflation.

Question 33

Output Gap:

Answer 33

The difference between actual output and potential output. A positive output gap indicates that the economy is producing above its potential, while a negative output gap indicates it is producing below its potential.

Question 34

Stabilization Policy:

Answer 34

Government actions, including fiscal and monetary measures, aimed at reducing economic fluctuations and smoothing out the business cycle. The goal is to minimize the effects of economic booms and busts on employment and inflation.

Question 35

Expansionary Fiscal Policy:

Answer 35

Government strategies to boost economic activity during periods of recession or economic downturn. This typically involves increasing government spending, cutting taxes, or both, to stimulate aggregate demand and reduce unemployment.

Question 36

Contractionary Fiscal Policy:

Answer 36

Government strategies to cool down an overheating economy and combat inflation. This usually involves decreasing government spending, increasing taxes, or both, to reduce aggregate demand and prevent the economy from overheating.

Question 37

Lump-Sum Taxes:

Answer 37

Taxes that are fixed amounts and do not vary with an individual’s income or spending. They are paid in a single lump sum rather than being adjusted based on the taxpayer’s economic activity. For example, a flat annual tax amount that everyone pays regardless of their income level.

Question 38

Automatic Stabilizers:

Answer 38

Economic policies and programs that automatically adjust to stabilize the economy without additional government action. For example, unemployment benefits and progressive tax systems automatically increase or decrease with economic conditions, providing a stabilizing effect during economic fluctuations.

Question 39

Discretionary Fiscal Policy:

Answer 39

Deliberate changes in government spending or taxation policies made by policymakers to influence economic conditions. Unlike automatic stabilizers, discretionary fiscal policy requires active intervention and decision-making by the government.