chapter 11 & appendix B

Output Increase Calculation

• When the government increases spending by 200 during a recession and the multiplier is 2.5, output will increase by 500.

Equilibrium GDP Change

• Booming economies abroad cause US net exports (NX) to increase by $50 billion.
• Given an MPC of 0.75, the equilibrium GDP will increase by $200 billion.

Aggregate Expenditure

• When aggregate expenditure exceeds GDP, inventories decrease, GDP increases, and employment increases.

Multiplier Size

• Bigger leakages will cause the multiplier to be smaller.
• Bigger leakages will cause changes in investor confidence to have a smaller effect on the economy.

Disposable Income Calculation

• Sasha's disposable income is $55,000; calculation: $50,000 (wages) + $10,000 (transfer payments) - $5,000 (taxes).

Economic Shifts

• An increase in an economy's output and a decrease in the price level indicates the aggregate supply curve has shifted to the right.

Full Capacity

• When a country's economy operates close to its full capacity, cyclical unemployment is close to zero.

Equilibrium Price Level

• Given the aggregate supply and demand data, the equilibrium price level is 400, where aggregate demand and supply are equal (8,000).

Unsustainable Production

• When output prices are sufficiently high, production exceeds potential GDP.
• The result is hyper-intense production, which will be unsustainable in the long run.

AD/AS Model

• In an AD/AS model, real GDP is shown on the horizontal axis.

Structural Unemployment

• An increase in structural unemployment will have no effect on aggregate supply or aggregate demand in an AD/AS diagram.

Inflationary Pressures

• Higher price base for goods/services relative to national household income due to inflationary pressures is shown in an AD/AS model.
• The effect is shown as a downward-sloping aggregate demand curve.

Rising Price Level

• If the price level of what firms produce is rising across an economy, but production costs remain constant, higher profits will induce expanded production.

Economic Production

• Economic production below full potential due to inadequate incentives for firms is likely to be short-term.

Oil Price Impact

• A significant increase in world oil prices will likely lead to an increase in input prices, which impacts aggregate supply.

Excess Capacity

• In an AD/AS model, the Keynesian zone of the AS curve signifies the point where the economy has excess capacity.

Recession

• Whether the economy is in a recession is illustrated in the AD/AS model.
• Illustrated by how close the equilibrium point is to the potential GDP line.

Cyclical Unemployment

• A shift to the left in either aggregate supply or aggregate demand in an AD/AS diagram could explain a rise in cyclical unemployment.

Aggregate Demand

• Aggregate demand curves slope downwards for all the following reasons; the interest rate effect, the foreign price effect, and the wealth effect.
• Aggregate demand curves do not slope downwards because of the substitution effect.

Aggregate Supply

• Aggregate supply (AS) denotes the relationship between the total quantity that firms choose to produce and sell and the price level for output, holding the price of inputs fixed.

Consumer Savings

• If disposable income is $50,000 and spending is $45,000, then savings are $5,000.

Investment

• An increase in interest rates will cause real investment spending to decline.

Consumption Spending

• The most important component of consumption spending is current disposable income.

Aggregate Expenditure

• The key idea in the aggregate expenditure-output model is that in any particular year, the level of GDP is determined by the level of aggregate expenditure.

Full Employment GDP

• Full employment GDP occurs when the economy is producing at its potential and unemployment is at the natural rate.

Productivity Growth

• Productivity growth shifts the aggregate supply curve in the long-term.
• This is the most important factor in the AD/AS model.

New Equilibrium

• If input prices rise and AS shifts to the left by 2,000 units, the new equilibrium price will match an output level of 7,000.

Increased Income Taxes

• A significant increase in individual income taxes will likely result in the economy experiencing lower economic growth.

Price Level Changes

• Changes in the price level of the different components of aggregate demand are reflected in the AD/AS macroeconomic model by a downward sloping aggregate demand curve.

Say's Law

• The steep portion of the aggregate supply curve in an AD/AS diagram is most relevant to Say's Law.

Full Employment GDP Term

• The term "full employment GDP" is synonymous with potential GDP.

Output Quantity

• The maximum quantity an economy can produce, considering its inputs, markets, and institutions, is potential GDP.

Wealth Effect

• The wealth effect means a higher price level leads to lower real wealth.

Say's Law Argument

• Say's Law states that a given value of supply must create an equivalent value of demand somewhere else in the economy.

Maximum Quantity

• The maximum quantity an economy can produce is called potential GDP, given its existing levels of labor, physical capital, technology, and institutions.

Macroeconomic Equilibrium

• The economy is in macroeconomic equilibrium if aggregate expenditure equals GDP.

National Income

• Based on the Keynesian cross diagram conditions, the equilibrium level of national income for this economy is Y=400.

New Price Level

• Input prices decrease and aggregate supply (AS) shifts right by 3,000 units at each price level; the new price level is 300.

Macroeconomics

• In macroeconomics, aggregate demand (AD) denotes the relationship between the total quantity of domestically produced goods and services purchased by consumers, businesses, and governments.
• AD also considers the price level for output.

Income Taxes

• A significant increase in individual income taxes is likely to result in unemployment rising.

Economic Change

• Deflation would cause an increase in the purchasing power of saved funds.

High Unemployment and Inflation

• Stagflation results when an economy experiences high unemployment and high inflation at the same time.

Aggregate Price Impact

• As the aggregate price level in an economy decreases, interest rates decrease.

Equilibrium Output

• The equilibrium output is 7,000; occurs where aggregate demand and aggregate supply are equal in the table.