Macroeconomics Unit 3 Summary

Introduction

• Presenter: Jacob Clifford
• Focus: AP Economics curriculum, but applicable to college and CLEP exams
• Covers aggregate demand, multiplier effects, short and long run aggregate supply, fiscal policy, and automatic stabilizers.
• Emphasized the importance of using the unit study guide.

Aggregate Demand

Key Concepts

• Aggregate demand curve: downward sloping; shows a negative relationship between price level and real GDP.
• Three effects causing the downward slope:
  • Real Wealth Effect: Higher price levels reduce purchasing power.
  • Interest Rate Effect: Higher price levels lead to higher interest rates, reducing spending.
  • Exchange Rate Effect: Higher domestic price levels reduce exports.

Shifters of Aggregate Demand

• Consumer spending
• Investment (business) spending
• Government spending
• Net exports

Multiplier Effects

Spending and Tax Multipliers

• Multiplier Effect: Initial changes in spending lead to larger changes in economic output.
• Important terms:
  • Marginal Propensity to Consume (MPC)
  • Marginal Propensity to Save (MPS)
• Spending Multiplier: 1 / MPS
• Tax Multiplier: One less than the spending multiplier

Short Run and Long Run Aggregate Supply

Short Run Aggregate Supply (SRAS)

• Upward sloping; direct relationship between price level and real GDP.
• SRAS shifts due to:
  • Price/availability of resources
  • Government actions (taxes, subsidies)
  • Productivity changes
  • Inflation expectations

Long Run Aggregate Supply (LRAS)

• No relationship between price level and real GDP in the long run.
• Full employment output at natural unemployment rate.
• LRAS shifts with technological advancements.

Combining Aggregate Demand and Supply

• Negative Output Gap: Below potential output (high unemployment)
• Full Employment: Output at potential level
• Positive Output Gap: Above potential output (low unemployment)

Adjustments and Shocks

• Negative and positive supply shocks
• Cost-push and demand-pull inflation

Fiscal Policy

Types

• Expansionary Fiscal Policy: Increases government spending, cuts taxes
• Contractionary Fiscal Policy: Decreases government spending, raises taxes

Application

• Aligns with multipliers to close output gaps

Automatic Stabilizers

• Non-discretionary fiscal policy that automatically adjusts to economic conditions:
  • Unemployment benefits and welfare
  • Progressive income tax system

Conclusion

• Unit 3 difficulty: 3.5/5
• Importance on exams
• Recommended to practice drawing graphs and calculations
• Prepare for Unit 4, which is more challenging

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