Aggregate Supply & Demand
This curve represents the total quantity of goods and services demanded at different price levels in the economy.
What is Aggregate Demand (AD)?
This is the formula used to calculate the government spending multiplier in macroeconomics.
What is 1/MPS or 1/(1-MPC)?
This occurs when an increase in consumer spending shifts aggregate demand to the right, causing price levels and real GDP to rise
What is an increase in aggregate demand?
This occurs when a recessionary gap causes high unemployment, putting downward pressure on wages over time.
What is long-run self-adjustment?
The term that represents when the level of spending households is even if their income is zero.
What is Autonomous Consumption?
This effect explains why, when the overall price level falls, the real value of households’ wealth rises, leading to an increase in consumption and a higher quantity of goods and services demanded.
What is the wealth effect?
If the marginal propensity to consume (MPC) is 0.75, calculate the government spending multiplier.
What is 4?
An improvement in technology that makes production more efficient would shift this curve, lowering prices and increasing output.
What is a rightward shift on the aggregate supply?
In the short run, sticky wages and prices prevent this curve from shifting quickly back to full employment.
What is the short-run aggregate supply curve?
These 3 types of delays can slow down the effect of fiscal policy on the economy.
What are recognition lag, administrative lag, and operational lag?
This effect explains why a higher price level causes interest rates to rise, reducing investment spending.
What is the interest-rate effect?
With an MPC of 0.8, the government cuts taxes by $100 billion. Calculate the tax multiplier and the total change in GDP.
What is a tax multiplier of -4 and a $400 billion increase in GDP?
This shifter of aggregate demand changes when consumers feel richer or poorer due to changes in stock prices or housing values.
What is the wealth effect?
This is the vertical curve that represents the economy’s potential output and does not change with the price level.
What is long-run aggregate supply?
___________ Fiscal Policy closes a Recessionary Gap and _____________ Fiscal Policy closes an Inflationary Gap.
What is Expansionary and Contractionary?
Fill in the blank(s): The __________ curve is upward sloping in the short run due to sticky wages, while the __________ curve is vertical in the long run because output is determined by potential GDP.
What is SRAS and LRAS?
If household income increased from $10,000 in 2025 to $25,000 in 2026, and the marginal propensity to consume (MPC) is 0.6, by how much did consumption increase?
What is $9000
Government tax cuts and increased government spending will shift this curve.
What is a rightward shift on aggregate demand?
This type of gap happens when real GDP is greater than potential GDP, creating upward pressure on wages and prices.
What is an inflationary gap?
These policies are government spending or taxation that cause fiscal policy to be automatically expansionary when the economy contracts and contradictory when the economy expands.
What are automatic stabilizers?
If the price level increases, and nothing else in the economy changes, the quantity of real GDP demanded decreases.
What is a movement along the AD curve?
Explain why the government spending multiplier is always larger than the tax multiplier, even when the MPC is the same.
What is because government spending directly increases aggregate demand, while tax changes only affect GDP through consumption?
This type of shock occurs when aggregate supply decreases while aggregate demand remains unchanged, resulting in higher prices and lower real GDP.
What is a negative supply shock?
If the economy is experiencing a recessionary gap, explain how the short-run and long-run aggregate supply curves adjust over time.
What is wages gradually fall, causing SRAS to shift right, output rises to potential GDP, and in the long run, the economy returns to full employment without changing LRAS?
When the economy increases spending by $100 billion, and the MPC is 0.8, what will be the total increase in GDP, and what is the Fiscal Policy used?
What is a $500 billion increase in GDP and expansionary fiscal policy?