Unit Three Test Flashcards
Demand
The ability and willingness to pay for a good or service
inverse relationship between price and demand
Supply
Different quantities of a good that sellers are willing and able to sell/produce at different prices
Aggregate demand
All the goods and services that buyers are willing and able to purchase at different price levels
AD=C+I+G+Xb
Wealth Effect
Higher price levels reduce the purchasing power of money
Interest Rates Effect
When the price level increases, lenders need to charge higher interest rates to get a REAL return on their loans. Higher interest rates discourage consumer spending and business investment
Foreign trade effect
when US price level rises, foreign buyers purchase US goods and Americans buy more foreign goods. Exports fall and imports rise causing GDP demanded the fall
Multiplier effect
Shows how spending is magnified in the economy
MPC
Change in consumption/ change in disposable income
MPS
Change in savings/ change in disposable income
1-MPC
Spending Multiplier
1/MPS
1/1-MPC
Total change in GDP
Multiplier X initial change in spending
Simple multiplier tax
MPC /MPS
Total change in GDP
Tax multiplier X initial change in taxes
Aggregate supply
The amount of goods and services that firms will produce in an economy at different price levels. The supply for everything by all firms
Negative supply shock
Raises production costs and reduces quantity producers are willing to supply at any given aggregate price level, left shift. Stagnation
Positive supply shock
Reduces production costs and increased the quantity supplied at any given aggregate price level, shift to right
