Macroeconomics Unit 3 Summary

Introduction

• Presenter: Jacob Clifford
• Focus: AP Economics curriculum, also relevant for college or CLEP exam students.
• Topics Covered: Aggregate demand, multipliers, aggregate supply, fiscal policy, and automatic stabilizers.

Aggregate Demand (AD)

• AD Curve: Downward sloping like a market demand curve.
  • Axes: Price level vs. Real GDP.
• Reasons for Downward Slope:
  • Real Wealth Effect
  • Interest Rate Effect
  • Exchange Rate Effect
• Shifters of AD Curve:
  • Consumer spending
  • Investment
  • Government spending
  • Net exports

Multiplier Effect

• Concept: Initial change in spending leads to a larger change in economic output.
• Key Factors:
  • Marginal Propensity to Save (MPS)
  • Marginal Propensity to Consume (MPC)
• Formulas:
  • Spending Multiplier = 1 / MPS
  • Tax Multiplier = (Spending Multiplier - 1)

Aggregate Supply (AS)

• Short-Run Aggregate Supply (SRAS):
  • Upward sloping; direct relationship between price level and real GDP in the short run.
  • Factors affecting SRAS: Prices of resources, government actions, productivity, and inflation expectations.
• Long-Run Aggregate Supply (LRAS):
  • Vertical; represents full employment output.
  • Can shift due to changes in technology.

Economic Graphing

• Key Graphs: Negative output gap, full employment, positive output gap.
• Terms:
  • Negative output gap (previously recessionary gap)
  • Positive output gap (previously inflationary gap)

Shifting Curves

• Four Scenarios:
  • Increase in AD
  • Decrease in AD
  • Increase in SRAS
  • Decrease in SRAS
• Types of Shocks:
  • Negative Supply Shock: Shortages, causes stagflation.
  • Positive Supply Shock: Surpluses, causes decreased price level.
• Inflation Types:
  • Cost-Push: SRAS shift to left.
  • Demand-Pull: AD increases.

Long-Run Self-Adjustment

• Concept: Economy adjusts without government intervention by changes in wages and resource prices.
• Negative Output Gap: Leads to lower wages/resource prices, SRAS shifts right.
• Positive Output Gap: Leads to higher wages/resource prices, SRAS shifts left.

Fiscal Policy

• Types:
  • Expansionary: Increases AD via increased government spending, tax cuts, or transfer payments.
  • Contractionary: Decreases AD via decreased government spending, increased taxes.
• Integration with Multipliers: Use fiscal policy and multipliers together to close economic gaps.

Automatic Stabilizers

• Definition: Non-discretionary fiscal policies that automatically adjust during economic changes.
• Examples:
  • Welfare and unemployment systems
  • Progressive income tax brackets

Conclusion

• Difficulty Level: 3.5/5.
• Importance: Significant portion of the final/AP exam.
• Next Steps: Understand the material well to prepare for the more challenging Unit 4.