Unit 3

• Multiplier

  Spending by a consumer within the economy will ripple through the economy and impact GDP by a greater amount
• Disposable income

  Personal income minus taxes
• Marginal propensity to save

  Percentage of new disposable income that a consumer will save rather than spend
• Spending multiplier

  1. 1 divided by the marginal propensity to save

  2. 1 divided by 1 minus the marginal propensity to consume
• Aggregate demand

  Demand for all goods and services within an entire economy
• Wealth effect

  As prices fall, real wealth increases, so consumers increase purchasing
• Net export effect

  At lower price levels, exports are cheaper for foreign countries, so exports increase
• Short-run aggregate supply curve

  Direct relationship between price level and quantity of goods and services produced
• Inflationary gap

  Current output exceeds long-run potential output
• Recessionary gap

  Current output is less than long-run potential output
• Long-run equilibrium

  Current output equals full employment output
• Increase in net exports

  Rightward shift of aggregate demand curve, causing inflationary gap
• Decrease in consumer confidence

  Leftward shift of aggregate demand curve, causing recessionary gap
• Decrease in oil prices

  Rightward shift of short-run aggregate supply curve, causing inflationary gap
• Restoring long-run equilibrium from recessionary gap

  Wages fall, short-run aggregate supply curve shifts right
• Expansionary fiscal policy

  Increases government spending and/or decreases taxes to fight unemployment
• Automatic stabilizers

  Anything that impacts the budget deficit when there is a change in the business cycle
• Examples of automatic stabilizers

  • Taxes
  • Transfer payments