AP Macro Unit 3 Vocab

Front

Wealth Effect

Back

Price levels effect purchasing power which effects spending

Front

Interest Rate Effect

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, then GDP decreases due to an increase in imports and a decrease in exports.

Front

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

Back

Price levels and economy will fix itself without government intervention.

Front

Keynesian Theory

Back

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

Front

Inflationary Gap

Back

Output is high and unemployment is less than NRU. Actual GDP is above potential GDP.

Front

Recessionary Gap

Back

Output is low and unemployment is more than NRU. Actual GDP is below 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)