AP Macro Unit 3 Vocab

Front

Wealth Effect

Back

Price levels affect purchasing power, influencing spending.

Front

Interest Rate Effect: When price levels rise, lenders charge higher interest rates, reducing consumer and business investment spending.

Back

When price levels increase, lenders need to charge higher interest rates which decreases consumer and business investment spending.

Front

Foreign Trade Effect

Back

When U.S. price levels rise, GDP decreases due to increased imports and decreased exports.

Front

Classical Theory

Back

Price levels and economy will fix itself. No Government involvement required.

Front

Keynesian Theory: “Sticky Wages” prevents wages from falling. The government should deficit spend to close the gap.

Back

“Sticky Wages” prevents wages from falling. The government should deficit spend to close the gap.

Front

Inflationary Gap

Back

Output is high; unemployment < NRU; Actual GDP > potential GDP.

Front

Recessionary Gap

Back

Output is low, unemployment > NRU, Actual GDP < potential GDP.

Front

Stagflation

Back

A gap with higher prices and a decrease in GDP

Front

Expansionary Fiscal Policy

Back

Laws that reduce unemployment and increase GDP (Close a Recessionary Gap) + G or – taxes (+C)

Front

Contractionary Fiscal Policy

Back

Laws that reduce inflation, decrease GDP (Close an Inflationary Gap) –G or + taxes (- C)