AP Macroeconomics Unit 3: National Income and Price Determination Study Guide

Macroeconomic Equilibrium

Occurs when the aggregate quantity of output demanded equals the aggregate quantity of output supplied.

Aggregate Demand (AD)

The total demand for goods and services within an economy at a given overall price level and in a given time period.

Short-Run Equilibrium

Exists when the quantity of goods and services demanded equals the quantity supplied at a specific price level.

Equilibrium Price Level ($PL_e$)

The price level at which the AD and SRAS curves intersect.

Equilibrium Real GDP ($Y_e$)

The level of output produced at the intersection of the AD and SRAS curves.

Recessionary Gap

Occurs when current real GDP is less than potential GDP, leading to higher unemployment.

Inflationary Gap

Occurs when current real GDP is greater than potential GDP, resulting in lower unemployment.

Stagflation

A situation characterized by inflation alongside stagnation in economic output.

Long-Run Aggregate Supply (LRAS)

A vertical curve representing the economy's potential output at full employment.

Self-Correction Mechanism

The process by which the economy returns to full employment without government intervention.

Expansionary Fiscal Policy

Policy actions aimed at increasing aggregate demand to combat recession.

Contractionary Fiscal Policy

Policy actions aimed at decreasing aggregate demand to combat inflation.

Multiplier Effect

The process by which an initial change in spending leads to a larger overall change in economic output.

Spending Multiplier

Calculated as 1 / Marginal Propensity to Save (MPS), indicating the impact of a change in government spending on GDP.

Tax Multiplier

Calculated as -Marginal Propensity to Consume (MPC) / Marginal Propensity to Save (MPS), indicating the impact of a tax change on GDP.

Automatic Stabilizers

Economic mechanisms that automatically counter fluctuations in the business cycle.

Progressive Income Taxes

Tax system where tax rates increase as income increases, affecting disposable income automatically.

Transfer Payments

Government payments such as unemployment benefits that automatically adjust based on economic conditions.

Sticky Wages

The concept that nominal wages are resistant to change, even in the face of unemployment.

Flexible Prices

The assumption in the long run that prices and wages can adjust freely to changes in the economy.

Fiscal Policy Tools

Government spending and taxation used to influence economic activity.

Budget Deficit

A financial situation where government expenditures exceed revenue.

Budget Surplus

A financial condition where government revenues exceed expenditures.

Real GDP

The total value of all goods and services produced in an economy, adjusted for inflation.

Natural Rate of Unemployment (NRU)

The level of unemployment consistent with a stable economy, where all resources are used efficiently.

Aggregate Supply (AS)

The total supply of goods and services that firms in an economy plan to sell during a specific time period.

Fluctuations in Business Cycle

The ups and downs in economic activity, characterized by periods of expansion and contraction.