AP Economics Chapter 29-30 McConnell 18th Edition – Flashcards
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Aggregate Demand-Aggregate Supply Model
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The macroeconomic model that uses aggregate demand and aggregate supply to determine and explain the price level and the real domestic output.
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Aggregate Demand
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A schedule or curve that shows the total quantity of goods and services demanded at different price levels.
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Real-Balance Effect
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The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level.
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Interest Rate Effect
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The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).
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Foreign Purchase Effect
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The inverse relationship between the net exports of an economy and its price level relative to foreign price levels.
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Determinants of Aggregate Demand
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Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve.
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Aggregate Supply
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A schedule or curve showing the total quantity of goods and services supplied (produced) at different price levels.
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Immediate Short-Run Aggregate Supply Curve
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An aggregate supply curve for which real output, but not the price level, changes when the aggregate demand curves shifts; a horizontal aggregate supply curve that implies an inflexible price level.
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Short-Run Aggregate Supply Curve
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An aggregate supply curve relevant to a time period in which input prices (particularly nominal wages) do not change in response to changes in the price level.
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Long -Run Aggregate Supply Curve
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The aggregate supply curve associated with a time period in which input prices (especially nominal wages) are fully responsive to changes in the price level.
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Determinants of Aggregate Supply
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Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve.
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Productivity
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A measure of average output or real output per unit of input. For example, the productivity of labor is determined by dividing real output by hours of work.
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Equilibrium Price Level
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The price level at which the aggregate demand curve intersects the aggregate supply curve.
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Equilibrium Real Output
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The gross domestic product at which the total quantity of final goods and services purchased (aggregate expenditures) is equal to the total quantity of final goods and services produced; the real domestic output at which the aggregate demand curve intersects the aggregate supply curve.
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Menu Costs
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The reluctance of firms to cut prices during recessions because of the costs of altering and communicating their price reductions; named after the cost associated with printing new menus at restaurants.
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Efficiency Wage
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A wage that minimizes wage costs per unit of output by encouraging greater effort or reducing turnover.
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Fiscal Policy
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Changes in government spending and tax collections designed to achieve a full-employment and noninflationary domestic output; also called discretionary fiscal policy.
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Council of Economic Advisors
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A group of three persons that advises and assists the president of the United States on economic matters.
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Budget Deficit
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The amount by which the expenditures of the Federal government exceed its revenues in any year.
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Contractionary Fiscal Policy
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A decrease in government purchases for goods and services, an increase in net taxes, or some combination of the two, for the purpose of decreasing aggregate demand and thus controlling inflation.
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Budget Surplus
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The amount by which the revenues of the Federal government exceed its expenditures in any year.
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Built-in Stablizer
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A mechanism that increases government's budget deficit during an expansion without any action by policymakers. The tax system is one such mechanism.
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Progressive Tax System
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A tax whose average tax rate increases as the taxpayer's income increases and decreases as the taxpayer's income decreases.
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Proportional Tax System
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A tax whose average tax rate remains constant as the taxpayer's income increases or decreases.
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Regressive Tax System
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A tax whose average tax rate decreases as the taxpayer's income increases and increases as the taxpayer's income decreases.
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Standardized Budget
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A comparison of the government expenditures and tax collections that would occur if the economy operates at full employment throughout the year; the full-employment budget.
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Cyclical Deficit
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A Federal budget that is caused by a recession and the consequent decline in tax revenue.
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Political Business Cycle
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The alleged tendency of Congress to destabilize the economy by reducing taxes and increasing government expenditures before elections and to raise taxes and lower expenditures after elections.
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Crowding-Out Effect
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A rise in interest rates and a resulting decrease in planned investment caused by the Federal government's increased borrowing to finance budget deficits and refinance debt.
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Public Debt
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The total amount owed by the Federal government to the owners of government securities; equal to the sum of past government budget deficits less government budget surpluses.
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U.S. Securities
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U.S. Treasury bills, notes, and bonds used to finance budget deficits; the components of the public debt.
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External Public Debt
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The portion of the public debt owed to foreign citizens, firms, and institutions.
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Public Invesetment
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Government expenditures on public capital and on human capital.
