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AP Macro: Unit 3 Review

Terms in this set (36)

Inflation
A general and progressive increase in prices
Inflation Rate
the percentage increase in the price level from one year to the next
Aggregate Supply
The level of Real GDP (GDPr) that firms will produce at each Price Level (PL)
SRAS
short-run aggregate supply
LRAS
Long run aggregate supply
LRAS definition
-marks the level of full employment in economy
-goes with PPC graph
-Yf=full employment
Determinants of SRAS
-Input Prices
-Productivity
-Legal-Institutional Environment
Input prices
-Domestic Resource Prices
-Foreign Resource Prices
-Market Power
Domestic Resource Prices
-Wages (75% of all business cost)
-Cost of Capital
-Raw Materials
Foreign Resource Prices
Strong dollar=lower foreign resource prices
Weak dollar=higher foreign resource prices
Market Power
-Monopolies & Cartels that control resources control the price of those resources
-Increase in resource prices=SRAS<-
-Decrease in resource prices=SRAS->
Productivity
total output/total inputs
-More productivity=lower unit production costs=SRAS->
-Lower productivity=higher unit production cost=SRAS <-
Legal-Institutional Environment
-Taxes & Subsides
-Gov't Regulation
Taxes & Subsides
Taxes=SRAS<-
Subsides=SRAS->
Government Regulation
Government Regulation=more compliance costs=SRAS<-
Government deregulation=less compliance costs=SRAS->
Aggregate Demand
Shows the amount of Real GDP (GDPr) that the private, public, and foreign sector collectively desire to purchase at each possible price level
Determinants of Aggregate Demand
-Consumption
-Gross-Private Investment
-Government Spending
-Net Exports
Consumption
spending by households on goods and services
Determinants of Consumption
-Consumer Wealth
-Consumer Expectations
-Household indebtedness
-Taxes
Consumer Wealth
^ Wealth= ^ spending (AD->)
decrease in wealth=decreased spending (AD<-)
Consumer Expectations
+ Expectations= ^ spending (AD->)
- expectations= decreased spending (AD<-)
Household Indebtedness
Less debt=more spending (AD->)
More dept=less spending (AD<-)
Taxes (Consumption)
more taxes=less spending (AD<-)
less taxes=more spending (AD->)
Gross Private Investment
-spending in order to increase future output or productivity
-business spending on capital, new construction, change in unsold inventories
Determinants of Gross Private Investment
-The Real Investment Rate
-Expected Returns
The Real Investment Rate
-decrease in interest rate= increase in investment (AD->)
-increase in interest rate= decrease in investment (AD<-)
Expected Returns
-The higher the expected returns=the higher the investment (AD->)
-The lower the expected returns=the lower the investment (AD<-)
Government Spending
^ Govt Spending=(AD->)
decrease Govt Spending=(AD<-)
Net Exports
Exports - Imports (X - M)
Changes in Net Exports
-Exchange Rates
-Relative Income
Exchange Rates
--$ Strong=More Imports & Fewer Exports=(AD<-)
--Weak $=Fewer Imports & More Exports=(AD->)
Relative Income
Strong Foreign Economies=More Exports=(AD->)
Weak Foreign Economies=Less Exports=(AD<-)
3 reasons aggregate demand
1.) Real-Balances Effect
2.) Interest-Rate Effect
3.) Foreign Purchases Effect
Real-Balances Effect
-When the price-level is high households & businesses can't afford to purchase as much output
-When the price-level is low households & businesses can afford to purchase more output
Interest Rate Effect
-A higher price-level increases the interest rate which tends to discourage investment
-Low PL decreases the interest rate which tends to encourage investment
Foreign Purchases Effect
-high PL ^ the demand for relatively cheaper imports
-Low PL ^ the demand for relatively cheaper US exports
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