Updated Unit 3 Flashcards
Aggregate Demand (definition)
all the goods and services that consumers, firms, and governments are willing and able to purchase at various price levels.
Reasons/effects the AD curve is downward sloping (3)
- Wealth Effect
- Interest Rate Effect
- Foreign Trade Effect
What happens to the aggregate real GDP when prices increase
decreases
Shifters of AD (4)
- Consumer Spending
- Investment spending
- Govt. spending
- Net Exports
What is the relationship between the price level and Real GDP?
Inverse
Is a change in price a movement along the curve or a shift of the curve?
movement along the curve
multiplier effect (def)
idea that an initial change in spending will set off a spending chain that is magnified in the economy. (velocity of money)
MPC (Def)
How much people consume rather than save when there is a change in income
MPS (def)
How much people save rather than consume when there is a change in income.
MPC Formula
change in consumer spending/
change in income
MPS Formula
change in savings/
change in income
spending multiplier formula
1/ 1/
MPS or 1-MPC
tax multiplier def
determines the maximum change in spending when the government either increases or decreases taxes
tax multiplier formula
-MPC/
MPS
what is the relationship between the MPC and the size of the spending multiplier?
the higher the MPC, the larger the spending multiplier
Short run aggregate supply
wages are sticky in the short run
shifters of SRAS (3)
- Resource price/availability
- Actions of the govt.
- Productivity
Long run aggregate supply
In the long run, wages and resources prices are flexible.
when is the LRAS curve vertical on the graph?
at full employment
Shifters of LRAS (3)
- size of workforce
- number of land resources available
- capital stock
when does Short-run aggregate equilibrium occur?
when the quantity of aggregate demanded is equal to the quantity of aggregate supply
when does Long-run equilibrium occur?
when the current output is also equal to potential output.
when do you have a surplus in GDP (graphically)
If the price level increases above equilibrium
when do you have a shortage in GDP (graphically)
If the price level decreases below equilibrium
Inflationary gap
an economy is producing a short-run Real GDP output that is beyond its potential Real GDP output at full employment
recessionary gap
an economy is producing a short-run Real GDP output that is less than its potential Real GDP at full employment.
expansionary fiscal policy
laws that increase output by either increasing government spending or decreasing taxes.
contractionary fiscal policy
laws that decrease inflation by decreasing government spending or increasing taxes.
