IB Economics Chapter 9

Aggregate Demand
The total quantity of goods and services that all buyers in an economy want to buy over particular time periods, at different possible price levels, ceteris paribus.
Aggregate Demand Curve
The curve that shows the relationship between total quantity of goods and services that all buyers in an economy want to buy over a particular time period, measure on the horizontal axis, plotted against the price level, measured on the vertical axis.
Aggregate Supply
The total quantity of goods and services produced in an economy over a particular time period at different price levels, ceteris paribus.
Business Confidence
A measure of the degree of optimism among firms in an economy about the future performance of firms and the economy. An important determinant of the consumption component of aggregate demand.
Consumer Confidence
A measure of the degree of optimism of consumer about their future income and the future of the economy. An important determinant of the consumption component of aggregate demand.
Corporate Indebtedness
The degree to which corporations have debts.
Determinants of Aggregate Demand
Factors that cause a shift in the AD curve. C, I, G, Xn (X-M). [See table on page 240 of Tragakes Textbook]
Disposable income
Income of consumers that is left over after the payment of income taxes.
Equilibrium Level of Output/ Equilibrium Level of real GDP
The level of output (real GDP) where the aggregate demand curve intersects the aggregate supply curve
Full Employment Level of Output (real GDP)/Potential Output
The level of output (real GDP) at which unemployment is equal to the natural rate of unemployment (when there is no deflationary or recessionary gap)
Household Indebtedness
The degree to which households have debts
Indebtedness
Refers to the level of debt, or the amount of money owed to creditors (lenders). May be on a household, firm, or country level.
Inflationary Gap
A situation where the real GDP is greater than the potential GDP. Unemployment is lower than the natural rate of unemployment. The AD curve intersect the SRAS curve at a higher level of real GDP than potential GDP.
Interest Rate
Interest expressed as a percentage in the case of borrowed money, it is interest as a percentage of the amount borrowed. Changes in interest rates form the basis of Monetary Policy.
Keynesian Multiplier
Ratio of real GDP divided by the change in any of the components of aggregate spending (C, I, G, X-M).
Long Run
Period of time when prices of resources (esp. wages) change along with the changes in the price level.
Long-run Aggregate Supply (LRAS) Curve
A curve showing the relationship between real GDP produced and the price level when resource prices (esp. wage) change to reflect change in the price level. Vertical at the Full Employment level of GDP, or potential GDP, indicating that in the long run, the economy produced potential GDP which is independent of the price level.
Keynesian Aggregate Supply Curve
Has 3 sections. 1) flat horizontal section. 2) upward sloping section. 3) vertical section (full employment).
Marginal Propensity to Consume (MPC)
The fraction of additional income spent on domestically produced goods and services. The larger the MPC, the larger the multiplier.
Marginal Propensity to Save (MPS)
The fraction of additional income that is saved. The larger, the smaller the multiplier.
Marginal Propensity to Tax (MPT)
The fraction of additional income that is paid as taxes. The larger, the smaller the multiplier.
Marginal Propensity to Import (MPI)
The fraction of additional income spent on imports. The larger, the smaller the multiplier.
Monetarist/New Classical Model
Includes two different models of the macro economy. Based on the following principles (i) the importance of the price mechanism in coordinating economic activities (ii) concept of competitive market equilibrium (iii) thinking about the economy as a harmonious system that automatically tends towards full employment.
Personal Income Taxes
Taxes paid by households or individuals in households on all forms of income, including wages, rental income, interest income, and dividends (income from ownership of shares in a company). Is the most important source of government tax revenues, esp. in developed countries.
Recessionary Gap (Deflationary Gap)
A situation where the real GDP is less than the potential GDP, and the unemployment is greater than the natural rate of unemployment. When AD curve intersect the SRAS curve at a lower level of real GDP than the potential GDP.
Short Run
It is the period of time during which the prices of resources, particularly the price of labour (wages) do not change (stay constant).
Short-run Aggregate Supply (SRAS) Curve
A curve showing the relationship between the price level and the quantity of real GDP produced by firmed when resource prices do not change.
Spare Capacity
Refers to physical capital that firms have available but do not use, esp. during recessions when there is unemployment of resources.