Macroeconomics Unit 2 Vocabulary – AD/AS Model
TERM
Marginal Propensity to
Consume (MPC)
Marginal Propensity to Save
(MPS)
Autonomous Change in
Aggregate Spending
Multiplier
Consumption Function
Autonomous Consumer
Spending
Aggregate Consumption
Function
Planned Investment
Spending
Inventories
Inventory Investment
Unplanned Inventory
DEFINITION
the ratio of the change in
consumption spending to a
given change in income. MPC
= change in C/change in Y
the increase in saving (nonpurchase of current goods
and services) that results
from an increase in income
initial rise or fall in
aggregate spending at a
given level of real GDP
An effect in economics in
which an increase in
spending produces an
increase in national income
and consumption greater
than the initial amount
spent.
The relationship between
consumption spending and
disposable income
the amount of money a
household would spend if it
had no disposable income
the relationship for the
economy as a whole
between aggregate current
disposable income and
aggregate consumer
spending
the investment spending
that businesses intend to
undertake during a given
period
Goods that have been
produced but not yet sold
Changes in the stock of
unsold goods and raw
materials held during a
period.
Goods already produced, but
EXAMPLE/DIAGRAM
Investment
Actual Investment Spending
Aggregate Demand Curve
Wealth Effect of a change in
Aggregate Price Level
Interest rate effect of a
change in the aggregate
price level
Fiscal policy
Monetary policy
Aggregate supply curve
Nominal wage
Sticky wages
Short-run aggregate supply
curve
not yet sold
the sum of planned
investment spending and
unplanned inventory
investment
A graph showing the
relationship between
aggregate demand and the
aggregate price level
...
Interest rates are directly
related to the price level.
Lower prices decrease
demand for money and thus
interest rates. Lower interest
rates increase consumption
and investment and thus
RGDP.
A government policy for
dealing with the budget
(especially with taxation and
borrowing)
Government policy that
attempts to manage the
economy by controlling the
money supply and thus
interest rates.
shows the quantity of
domestic product that is
supplied at each possible
value of the price level
the dollar amount of the
wage paid
nominal wages that are slow
to fall even in the face of high
unemployment and slow to
rise even in the face of labor
shortages
The relationship between
the quantity of real GDP
supplied and the price level
when the money wage rate,
the prices of other resources,
and potential GDP remain
Long-run aggregate supply
curve
Potential output
AD-AS model
Short-run macroeconomic
equilibrium
Short-run equilibrium
aggregate price level
Short-run equilibrium
aggregate output
Demand shock
Supply shock
Stagflation
Long-run macroeconomic
equilibrium
Recessionary gap
constant.
The vertical curve at the
level of Natural Real GDP.
Represents the output the
economy produces when
wages and prices have
adjusted to their final
equilibrium levels and when
workers do not have any
relevant misperceptions.
The real output (GDP) an
economy can produce when
it fully employs its available
resources
the aggregate supply curve
and the aggregate demand
curve are used together to
analyze economic
fluctuations
occurs when the qantity of
real GDP demanded equals
the quantity of real GDP
supplied
the price level and real GDP
that result when the
aggregate demand curve
intersects the short-run
aggregate supply curve
when the quantity of
aggregate output supplied is
equal to the quantity
demanded (quantity
supplied = quantity
demanded)
an event that shifts the
aggregate demand curve
a sudden shortage of a good
A period of falling output
and rising prices
a situation that occurs when
real GDP equals potential
GDP- the economy is on its
long-run aggregate supply
curve
The amount by which
Inflationary gap
Output gap
Self-correcting
Stabilization policy
Social insurance
Expansionary fiscal policy
Contractionary fiscal policy
Lump-sum taxes
Automatic stabilizers
aggregate spending at full
employment falls short of
full employment output.
The amount by which
equilibrium GDP exceeds
full-employment GDP.
the difference between
actual output and potential
output
when shocks to aggregate
demand affect aggregate
output in the short run, but
not the long run
describes both monetary and
fiscal policy, the goals of
which are to smooth out
fluctuations in output and
employment and to keep
prices as stable as possible
Programs in which eligibility
is based on prior
contributions to
government, usually in the
form of payroll taxes.
An increase in government
purchases of goods and
services, a decrease in net
taxes, or some combination
of the two for the purpose of
increasing aggregate
demand and expanding real
output
Fiscal policy used to
decrease aggregate demand
or supply. Deliberate
measures to decrease
government expenditures,
increase taxes, or both.
Appropriate during periods
of inflation.
taxes that don't depend on
the taxpayer's income
Changes in fiscal policy that
stimulate aggregate demand
when the economy goes into
Discretionary fiscal policy
a recession without
policymakers having to take
any deliberate action
Changes in taxes or spending
that are the result of
deliberate changes in
government policy.