UNIT 4 VOCABULARY: NATIONAL INCOME AND PRICE DETERMINATION Flashcards
Marginal Propensity to Consume (MPC):
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.
Marginal Propensity to Save (MPS):
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.
Autonomous Change in Aggregate Spending:
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.
Multiplier:
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.
Consumption Function:
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.
Autonomous Consumer Spending:
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.
Planned Investment Spending:
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.
Inventories:
The stock of goods that businesses hold for future sales. Inventories include unsold products and raw materials used in production.
Inventory Investment:
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.
Unplanned Inventory Investment:
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.
Actual Investment Spending:
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.
Aggregate Demand Curve:
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.
Wealth Effect of a Change in the Aggregate Price Level:
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.
Interest Rate Effect of a Change in the Aggregate Price Level:
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.
Fiscal Policy:
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.
Monetary Policy:
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.
Aggregate Supply Curve:
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.
Nominal Wage:
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.
Sticky Wages:
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.
Short-Run Aggregate Supply Curve:
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.
Long-Run Aggregate Supply Curve:
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.
Potential Output:
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.
AD/AS Model:
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.
Short-Run Macroeconomic Equilibrium:
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.
