Macroeconomics Unit 3 Summary

Introduction

• Lecturer: Jacob Clifford
• Focus: AP Economics curriculum, applicable to college students and CLEP exam takers.

Topics Covered

1. Aggregate Demand
2. Multiplier Effects
3. Short-run and Long-run Aggregate Supply
4. Fiscal Policy
5. Automatic Stabilizers

Aggregate Demand

• Concept: Demand for everything in an economy.
• Curve: Downward sloping; negative relationship between price level and real GDP.
• Reasons for Slope:
  • Real Wealth Effect
  • Interest Rate Effect
  • Exchange Rate Effect
• Shifters:
  • Consumer Spending
  • Investment
  • Government Spending
  • Net Exports

Multiplier Effects

• Definition: Initial change in spending results in larger economy-wide changes.
• Key Concepts:
  • Marginal Propensity to Save (MPS)
  • Marginal Propensity to Consume (MPC)
• Equations:
  • Spending Multiplier: 1 / MPS
  • Tax Multiplier: 1 less than the spending multiplier

Aggregate Supply

Short-run Aggregate Supply (SRAS)

• Curve: Upward sloping; direct relationship between price level and real GDP.
• Shifters:
  • Key resource price changes
  • Government actions (taxes, subsidies)
  • Productivity
  • Inflation expectations

Long-run Aggregate Supply (LRAS)

• Characteristics: No relationship between price level and real GDP in the long run.
• Shifters: Changes in technology, productivity, etc.

AD-AS Model

• States of Economy:
  • Negative Output Gap
  • Full Employment
  • Positive Output Gap
• Supply Shocks:
  • Negative Supply Shock: Causes stagflation
  • Positive Supply Shock
• Inflation Types:
  • Cost-push Inflation
  • Demand-pull Inflation

Self-adjustment

• Concept: Economy self-adjusts in the long run without government intervention.
• Mechanism:
  • Negative Output Gap: SRAS shifts right over time
  • Positive Output Gap: SRAS shifts left over time
• Long-term Effects: Full employment

Fiscal Policy

• Types:
  • Expansionary: Increase spending, cut taxes
  • Contractionary: Decrease spending, raise taxes
• Key Skill: Using fiscal policy in conjunction with multipliers

Automatic Stabilizers

• Definition: Pre-existing laws that stabilize the economy without new legislation.
• Examples:
  • Unemployment benefits
  • Welfare
  • Progressive tax system

Study Tips

• Graphing and Calculations: Key to mastering the unit.
• Practice: Fill out study guides and practice sheets.

Conclusion

• Difficulty: Rated 3.5 out of 5
• Next Steps: Prepare for Unit 4, which is trickier.