Macro Unit 3 Key Ideas 
Unit 3: Aggregate Demand and Aggregate Supply:
 Fluctuations in Outputs and Prices

• Aggregate demand (AD) and aggregate supply (AS) curves look and operate much like the
  supply and demand curves used in microeconomics.  However, these macroeconomic
  AD and AS curves depict different things, and they change for different reasons than
  microeconomic demand and supply curves.  AD and AS curves can be used to illustrate
  changes in real output and the price level of an economy.
  
  
• The downward sloping aggregate demand curve is explained by the wealth effect,
  the income effect, and the foreign purchases effect.
  
  
• The aggregate supply curve is divided into three ranges: the horizontal or Keynesian range,
  the upward sloping or intermediate range, and the vertical or classical range.
  
  
• Changes in the price level and output are illustrated by shifts and movements along
  the aggregate demand and supply curves.
  
  
• Shifts in the aggregate demand can change the level of output and the price level or both. 
  The determinants of AD include changes in consumer spending, investment spending,
  Economics spending, and net export spending.
  
  
• Shifts in aggregate supply can also change the level of output and the price level. 
  Determinants of AS include changes in input prices, productivity, the legal institutional
  environment, and the quantity of available resources.
  
  
• Changes in outputs can also be illustrated by the Keynesian expenditure-output mode. 
  This model differs from the AD/AS model because in the Keynesian model the price level
  is assumed to be constant.  The Keynesian model has fixed prices.
  
  
• The AD/AS model can be reconciled with the Keynesian expenditure-output model. 
  In the Keynesian (horizontal) range of the AS curve, both models are identical. 
  The models differ in the intermediate and vertical range of the AS curve.
  
  
• Autonomous spending is the part of AD that is independent of the current rate of economic activity.
  
  
• Induced spending is that part of AD that depends upon the current rate of economic activity.
  
  
• The multiplier is a number that influences the relationship of changes in autonomous
  spending to changes in real GDP.
  
  
• The formula for calculating the multiplier is:  M=1/MPS   or   M=1/1-MPC
  
  
• The multiplier results from subsequent rounds of induced spending that occur when
  autonomous spending changes.
  
  
• Keynesian economists believe the equilibrium levels of GDP can occur at less than or more
  than the full-employment level of GDP.  Classical economists believe that long-run equilibrium
  can occur only at full employment.
  
  
• Fiscal policy consists of Economics actions that may increase or decrease aggregate demand. 
  These actions involve changes in Economics spending and taxing.
  
  
• The Economics uses an expansionary fiscal policy to try to increase or decrease aggregate
  demand.  These actions involve changes in Economics spending and taxing.
  
  
• The Economics uses a contractionary fiscal policy to try to decrease aggregate demand during
  a period of inflation.  The Economics may increase taxes, decrease spending, or do a combination of the two.
  
  
• Discretionary fiscal policy means the federal Economics must take deliberate action or pass a
  new law changing taxes or spending.  The automatic or built-in stabilizers change Economics
  spending or taxes without new laws being passed or deliberate action being taken.
  
  
• The balanced budget multiplier indicates that equal increases or decreases in taxes and Economics
  spending increase or decrease equilibrium GDP by an amount equal to that increase or decrease.
  
  
• Stagflation can be explained by a decrease in aggregate supply.