Unit 3 Vocab

Autonomous Consumer Spending

Part of consumption independent of disposable income Example: People might still consume basic goods and services - like food and housing - even without income.

Planned Investment Spending

Planned expenditure on capital goods and inventory Example: A company may plan to invest $2 million in new machinery over the next fiscal year.

Short-run Macroeconomic Equilibrium

Point where AD equals SRAS in the short run Example: A situation where increased consumer spending raises Aggregate Demand to meet the current Aggregate Supply, achieving equilibrium.

Marginal Propensity to Consume (MPC)

Proportion of additional income spent on consumption Example: If an individual spends $80 out of an extra $100 earned, the MPC is 0.8.

Multiplier

Ratio of change in GDP to initial change in spending Example: If the spending multiplier is 1.5, a $100 increase in government spending might increase GDP by $150.

Consumption Function

Relationship describing household consumption with disposable income Example: The relationship can be modeled as C = a + b(Yd), where "C" is consumption, "a" is autonomous consumption, "b" is MPC, and "Yd" is disposable income.

Aggregate Consumption Function

Relationship expressing consumption expenditures of an economy Example: Across an entire economy, the aggregate consumption function will illustrate how total consumer spending changes with overall disposable income.

Stagflation

Situation of stagnant growth, high unemployment, and high inflation Example: The 1970s U.S. economy experienced stagflation, partly due to oil price shocks.

Long-run Macroeconomic Equilibrium

State where AD and SRAS intersect at potential output Example: When the economy naturally adjusts to a point where there is neither upward nor downward pressure on the price level.

Lump-sum Taxes

Tax that is the same amount for every taxpayer Example: If every individual has to pay $1,000 annually as a tax, irrespective of their income, it's a lump-sum tax.

Actual Investment Spending

Total investment spending including planned and unplanned inventory investment Example: If a firm planned to invest $5 million but due to unplanned inventory increases spends $6 million, the actual investment spending is $6 million.

Short-run Equilibrium Aggregate Output

Total output when AD equals SRAS Example: If total production is 100 billion units where AD intersects with SRAS, this represents the short-run equilibrium aggregate output.

Supply Shock

Unexpected event affecting economy's capacity to produce goods and services Example: A sudden increase in oil prices can result in a negative supply shock, as production costs rise across various industries.

Demand Shock

Unexpected event changing demand for goods or services Example: The outbreak of COVID-19 reduced consumer and business activities, representing a negative demand shock.

Unplanned Inventory Investment

Unintended change in inventories due to gap between actual and expected sales Example: If a company manufactures 1,000 units but only sells 900, the additional 100 units become unplanned inventory investment.

Nominal Wage

Wage paid to labor in money terms, not adjusted for inflation Example: If a worker earns $20 per hour, this is the nominal wage, not taking the purchasing power of these $20 into account.

Self-Correcting

Automatic shifting of SRAS or AD back to long-run equilibrium Example: Following a recession, wages may eventually fall, shifting SRAS rightward and moving the economy back toward potential output.

Monetary Policy

Actions by central bank to determine money supply growth Example: The central bank might lower interest rates to encourage borrowing and spending in an economic downturn.

Recessionary Gap

Amount by which real GDP falls short of potential output Example: During the 2008 financial crisis, the U.S. economy experienced a significant recessionary gap.

Wealth Effect of a Change in the Aggregate Price Level

Change in consumer spending due to altered perceived wealth Example: If the price level falls, the purchasing power of money rises, possibly leading to increased consumer spending.

Interest Rate Effect of a Change in the Aggregate Price Level

Change in investment and consumer spending due to altered interest rates Example: When the price level falls, interest rates may also decline, leading to increased spending and investment.

Inventory Investment

Change in stock of inventories held by businesses Example: If a business increases its inventory stock from $5 million to $6 million, its inventory investment is $1 million.

Short-run Aggregate Supply Curve (SRAS)

Curve representing total quantity of goods and services firms supply Example: A sudden increase in oil prices may shift the SRAS curve leftward, as production costs rise.

Aggregate Supply Curve

Curve showing quantity of goods and services producers are willing to supply Example: In the short run, higher prices (due to, for example, increased demand) might incentivize firms to produce more, moving along the aggregate supply curve.

Aggregate Demand Curve

Curve showing quantity of goods and services wanted at each price level Example: If the wealth effect causes consumers to buy more at every price level, the aggregate demand curve would shift to the right.

Long-run Aggregate Supply Curve (LRAS)

Curve showing total quantity of goods and services an economy can produce Example: Technological progress might shift LRAS to the right, indicating potential for higher output in the future.

Discretionary Fiscal Policy

Deliberate manipulation of taxes and government spending Example: A government may implement a new public works program to stimulate economic activity during a downturn.

Output Gap

Difference between actual GDP and potential GDP Example: If actual GDP is $20 trillion and potential GDP is $21 trillion, the output gap is -$1 trillion.

Automatic Stabilizers

Economic policies designed to offset fluctuations without intervention Example: Unemployment benefits automatically increase during a recession, providing additional spending in the economy.

Marginal Propensity to Save (MPS)

Fraction of additional income saved rather than consumed Example: If a person saves $20 out of an additional $100 of income, the MPS is 0.2.

Inventories

Goods and materials held for resale Example: A car dealership might have an inventory of various car models, held in anticipation of future sales.

Fiscal Policy

Government adjustments to spending levels and tax rates Example: The government might increase public spending and reduce taxes during a recession to stimulate economic activity.

Stabilization Policy

Government policy aiming to smooth out economic cycle Example: During a recession, a government might use expansionary fiscal policy as a stabilization policy.

Expansionary Fiscal Policy

Government policy increasing spending or decreasing taxes Example: The 2009 U.S. stimulus package aimed to spur economic activity through expansionary fiscal policy.

Contractionary Fiscal Policy

Government policy reducing spending or increasing taxes Example: To cool off the booming economy of the late 1990s, the U.S. government might have implemented contractionary fiscal policies.

Social Insurance

Government programs protecting against economic hardship Example: Unemployment insurance provides financial support to people who lose their jobs.

Potential Output

Highest level of real GDP without pressuring inflation Example: If an economy can produce up to $20 trillion without causing inflation, that amount is its potential output.

Autonomous Change in Aggregate Spending

Initial change in desired spending independent of income changes Example: Government increases infrastructure spending by $200 million without a corresponding change in national income.

AD-AS Model

Model utilizing Aggregate Demand and Aggregate Supply curves Example: Analyzing how a government spending surge affects price levels and output through the AD-AS model.

Inflationary Gap

Occurs when actual output exceeds potential output Example: During periods of rapid economic expansion, an economy may experience an inflationary gap.

Short-run Equilibrium Aggregate Price Level

Overall price level in the economy when AD equals SRAS Example: If the average price of goods/services is $30 when AD intersects with SRAS, this is the short-run equilibrium aggregate price level.

Sticky Wages

Wages that do not adjust quickly to labor market conditions Example: During an economic downturn, existing labor contracts or minimum wage laws might prevent wages from falling in line with decreased demand for labor.