AP®︎ Macroeconomics: Unit 3 Flashcards
Master key terms and definitions for Unit 3 of AP Macroeconomics – National Income and Price Determination to help you prep for quizzes and the AP exam.
Aggregate Demand Curve
A downward-sloping graph showing the relationship between price level and real GDP demanded.
A downward-sloping graph showing the relationship between price level and real GDP demanded.
Consumption, investment, government spending, and net exports; together summarized as C + I + G + (X - M).
A higher price level reduces purchasing power, lowering consumption; a lower price level does the opposite.
A higher price level raises interest rates and reduces investment; a lower price level lowers rates and increases investment.
A higher domestic price level reduces exports and raises imports, lowering net exports.
A rightward shift means more real GDP demanded at every price level; a leftward shift means less.
Price-level changes move along the curve, while non-price changes in C, I, G, or net exports shift it.
An initial change in spending causes a larger overall change in real GDP.
Spending changes that occur independently of current real GDP and start the multiplier process.
They equal changes in consumption and saving over disposable income, and together sum to one.
Multiply the initial change by the multiplier; spending and GDP match, while taxes move oppositely.
MPC is the fraction of each additional dollar of disposable income that is spent, and MPS is the fraction that is saved; together they sum to 1.
The relationship between the price level and real output firms produce in the short run.
A change in the overall price level causes a change in real output supplied.
Changes in production costs, inflationary expectations, resources, government policy, or productivity shift the curve.
The main short-run supply shifters: input costs and availability, policy changes, and efficiency.
Higher expected inflation raises input costs and shifts short-run aggregate supply left.
Along SRAS, higher price levels are associated with higher output, more employment, and lower unemployment.
Higher price levels raise output because wages and input prices are sticky short run.
Short run has some fixed input prices; long run has fully flexible wages and prices.
Both show an economy's maximum productive capacity, so outward PPC shifts match rightward LRAS shifts.
Changes in resource quantity, resource quality, or policy that alter potential output.
More labor, capital, or natural resources increase potential output; less shifts capacity downward.
Better education, skills, technology, or infrastructure raise productivity and increase potential output.
Government incentives affecting work, investment, or productivity can increase or decrease potential output.
With fully flexible wages and prices, inflation cannot permanently lower unemployment below its natural rate.
A vertical curve at full-employment real GDP because wages and prices fully adjust.
Changes in productive capacity shift the curve right with growth or left with decline.
The unemployment rate that exists when the economy is producing at full-employment output.
The economy's maximum sustainable real output when all resources are fully employed; this level of potential or full-employment output is shown by the LRAS curve.
Occurs where aggregate demand and short-run aggregate supply intersect at the current price level and real output.
The difference between actual real GDP and potential real GDP, which can be positive or negative.
When short-run equilibrium real GDP exceeds potential real GDP, placing output to the right of LRAS.
When short-run equilibrium real GDP is below potential real GDP, placing output to the left of LRAS.
The point where aggregate demand, short-run aggregate supply, and long-run aggregate supply intersect at full-employment output and the full-employment price level.
A rightward shift of aggregate demand that raises output, employment, and the price level.
A leftward shift of aggregate demand that lowers output, employment, and the price level.
A rightward shift of short-run aggregate supply that raises output and employment but lowers the price level.
A leftward shift of short-run aggregate supply that lowers output and employment but raises the price level.
A rise in the price level caused by an increase in aggregate demand.
A rise in the price level caused by a decrease in short-run aggregate supply.
An unexpected increase in key resource availability that lowers costs and increases productivity.
An unexpected decrease in key resource availability that raises costs and reduces productivity.
Consumer spending, investment spending, government spending, and net exports; changes shift aggregate demand.
Resource prices and availability, government actions, and productivity or technology; changes shift short-run aggregate supply.
Output is below full employment; wages fall, SRAS shifts right, and output returns to potential.
Output is above full employment; wages rise, SRAS shifts left, and output returns to potential.
A shift in demand changes output and employment temporarily, but long-run output returns to potential.
A temporary supply shift changes output and prices short run, then wage adjustment restores potential output.
A lasting drop in productivity or resources shifts LRAS and SRAS left, lowering potential output.
Flexible wages and prices shift SRAS until output returns to full-employment real GDP.
Changes in resources, technology, or productivity shift potential output and show long-run economic growth.
A lasting increase in productivity or resources shifts LRAS and SRAS right, raising potential output.
Government use of spending, taxes, and transfers to influence aggregate demand and output.
Government spending changes aggregate demand directly; taxes and transfers change it indirectly through disposable income.
Expansionary raises aggregate demand with higher spending or lower taxes; contractionary lowers it with lower spending or higher taxes.
Discretionary requires new government action; nondiscretionary works automatically through existing tax and spending laws.
A recessionary gap is output below full employment; an inflationary gap is output above full employment.
Shows fiscal policy as shifts in aggregate demand while short-run aggregate supply and long-run aggregate supply stay unchanged.
Divide the output gap by the spending multiplier or tax multiplier to find the needed policy change.
Delays occur because recognizing problems, passing legislation, and implementing policy all take time.
Expansionary policy shifts aggregate demand right; contractionary policy shifts it left in the short run.
The tax multiplier is smaller in absolute value than the government spending multiplier because tax changes affect aggregate demand only through disposable income and only the portion that is consumed is multiplied, while all government spending enters aggregate demand directly.
It equals 1 divided by MPS and measures the total change in real GDP resulting from an initial change in government spending or other autonomous expenditures.
It equals negative MPC divided by MPS and measures the change in real GDP resulting from a change in taxes.
A tax system in which higher incomes are taxed at higher marginal rates.
They fall when GDP falls, but rise when GDP rises, helping stabilize consumption.
Government payments to households rise in downturns and fall in expansions, cushioning income changes.
Payments to eligible jobless workers that increase automatically during recessions.
An antipoverty program providing temporary cash assistance to low-income families, especially during downturns.
They tend to increase deficits in recessions and increase surpluses or reduce deficits in booms.
They increase spending in recessions and restrain it in booms, reducing extremes.
Built-in taxes and transfer programs that automatically reduce swings in real GDP, employment, and inflation without new legislation.
