AP Macro Unit 3

discretionary fiscal policy

A discretionary fiscal policy is a government policy that changes government spending or taxes. Its purpose is to expand or shrink the economy as needed.

recessionary gap

A recessionary gap is a macroeconomic term which describes an economy operating at a level below its full-employment equilibrium. Under a recessionary gap condition, the level of real gross domestic product (GDP) is lower than the level of full employment, which puts downward pressure on prices in the long run.

Short-run equilibrium

A short run competitive equilibrium is a situation in which, given the firms in the market, the price is such that that total amount the firms wish to supply is equal to the total amount the consumers wish to demand.

demand shock

A sudden surprise event that temporarily increases or decreases demand for goods or services.

supply shock

A supply shock is an unexpected event that suddenly changes the supply of a product or commodity, resulting in an unforeseen change in price.

lump-sum taxes

A tax in which the taxpayer is assessed the same amount regardless of circumstance.

actual investment spending

Actual Investment is the investment expenditures that the business sector actually undertakes during a given time period, including both planned investment and any unplanned inventory changes.

AD Curve

Aggregate demand is the total amount of goods and services demanded in the economy at a given overall price level at a given time.

inflationary gap

An inflationary gap is a macroeconomic concept that describes the difference between the current level of real gross domestic product (GDP) and the anticipated GDP that would be experienced if an economy is at full employment. See also potential GDP

AAS

An output gap indicates the difference between the actual output of an economy and the maximum potential output of an economy expressed as a percentage of gross domestic product (GDP). A country's output gap may be either positive or negative. The calculation for the output gap is Y-Y* where Y is actual output and Y* is potential output.

output gap (know equation)

An output gap indicates the difference between the actual output of an economy and the maximum potential output of an economy expressed as a percentage of gross domestic product (GDP). A country's output gap may be either positive or negative. The calculation for the output gap is Y-Y* where Y is actual output and Y* is potential output.

automatic stabilizers

Automatic stabilizers are a type of fiscal policy designed to offset fluctuations in a nation's economic activity through their normal operation without additional, timely authorization by the government or policymakers

autonomous consumer spending

Autonomous consumption is defined as expenditures taking place when disposable income levels are at zero.

fiscal policy

Changes in government expenditures and/or taxes to achieve economic efficiency

contractionary fiscal policy

Contractionary fiscal policy is a form of fiscal policy that involves increasing taxes, decreasing government expenditures or both in order to fight inflationary pressures.

expansionary fiscal policy

Expansionary fiscal policy is a form of fiscal policy that involves decreasing taxes, increasing government expenditures or both, in order to fight recessionary pressures.

fiscal policy lags

In economics we often see a delay between an economic action and a consequence. This is known as a time lag.

Potential output

In economics, potential output (also referred to as "natural gross domestic product") refers to the highest level of real gross domestic product (potential output) that can be sustained over the long term.

consumption function (know equation)

In economics, the consumption function describes a relationship between consumption and disposable income. C = C + bY

Shifts of the AS Curve

In the short-run, examples of events that shift the aggregate supply curve to the right include a decrease in wages, an increase in physical capital stock, or advancement of technology. The short-run curve shifts to the right the price level decreases and the GDP increases.

inventories

Inventory or stock is the goods and materials that a business holds for the ultimate goal of resale.

monetary policy

Is how a central bank or other agency governs the supply of money and interest rates in an economy in order to influence output, employment, and prices.

short-run AS

SRAS assumes that the level of capital is fixed. (i.e. in the short run you can't build a new factory)

Short-run price

Short run costs are accumulated in real time throughout the production process. Fixed costs have no impact of short run costs, only variable costs and revenues affect the short run production.

Shifts of the AD Curve

The aggregate demand curve shifts to the right as a result of monetary expansion. In an economy, when the nominal money stock in increased, it leads to higher real money stock at each level of prices. The interest rates decrease which causes the public to hold higher real balances.

aggregate consumption function (know equation)

The classic consumption function suggests consumer spending is wholly determined by income and the changes in income AE = C + I + G + NX.

self-correcting

The idea that an economy producing at an equilibrium level of output that is below or above its full employment will return on its own to its full employment level if left to its own devices. Requires flexible wages and prices, and therefore is only likely to happen in the long-run

Interest Rate Effect

The impact of a rise in the cost of borrowing on production costs due to price inflation within an economy. The interest rate effect reflects the fact that most consumers and business finance managers will cut back on their borrowing activities when interest rates increase.

LRAS

The long-run aggregate supply curve is vertical which reflects economists' beliefs that changes in the aggregate demand only temporarily change the economy's total output. In the long-run, only capital, labor, and technology affect aggregate supply because everything in the economy is assumed to be used optimally.

Long Run Equilibrium

The long-run equilibrium of a perfectly competitive market occurs when marginal revenue equals marginal costs, which is also equal to average total costs

Net Export Effect

The net-export effect works like this: A higher price level increases the relative price of domestic exports to other countries while decreasing the relative price of foreign imports from other countries. This results in a decrease in exports and an increase in imports and thus a decrease in net exports.

Multiplier (know equation)

The number that is multiplied by the change in autonomous (new) spending to obtain the overall change in total spending

MPC (know equation)

The ratio of the change in consumption to the change in disposable income. 1 - MPS

MPS (know equation)

The ratio of the change in saving to the change in disposable income. 1 - MPC

AS Curve

The total quantity of output firms will produce and sell—in other words, the real GDP.

Wealth Effect

The wealth effect is a behavioral economic theory suggesting that people spend more as the value of their assets rise. The idea is that consumers feel more financially secure and confident about their wealth when their homes or investment portfolios increase in value.

Unplanned Inventory Investment

Unplanned inventory investment occurs when actual sales are more or less than businesses expected, leading to unplanned changes in inventories.

sticky wages

When workers' earnings don't adjust quickly to changes in labor market conditions.

commodities

a raw material or primary agricultural product that can be bought and sold, such as copper or coffee.

Nominal wages

is the rate of pay employees are compensated.

short-run output

key principle guiding the concept of the short run and the long run is that in the short run, firms face both variable and fixed costs, which means that output, wages, and prices do not have full freedom to reach a new equilibrium.

stagflation

persistent high inflation combined with high unemployment and stagnant demand in a country's economy.

social insurance

protection of the individual against economic hazards (such as unemployment, old age, or disability) in which the government participates or enforces the participation of employers and affected individuals.

stabilization policy

seeks to keep an economy on an even keel by increasing or decreasing interest rates as needed. Interest rates are raised to discourage borrowing to spend and lowered to boost borrowing to spend. The intended result is an economy that is cushioned from the effects of wild swings in demand.

Tax Multiplier

tax increase = -MPC / MPS; tax cut MPC / MPS. Always 1 less than comparable spending multiplier.

inventory investment

the INVESTMENT in raw materials, WORK IN PROGRESS and finished STOCK.

planned investment spending

the investment spending that a business plans to undertake during a particular period. negatively related to the interest rate: higher interest rates lead to lower levels of planned investment.