1. Section 4

2. Key Terms Marginal Propensity to Consume
Interest rate effect of a change in the aggregate price level
Supply Shock
Stagflation
Marginal Propensity to Save
Recessionary Gap
Autonomous Change in Aggregate Spending
Fiscal Policy
Inflationary Gap
Monetary Policy
Output Gap
Spending Multiplier
Aggregate Supply Curve
Self-Correcting
Consumption Function
Nominal Wage
Stabilization Policy
Autonomous Consumer Spending
Sticky Wages
Social Assistance
Short-Run Aggregate Supply Curve
Expansionary Fiscal Policy
Aggregate Consumption Function
Contractionary Fiscal Policy
Long-Run Aggregate Supply Curve
Planned Investment Spending
Tax Multiplier
Inventory Investment
Potential Output
Balanced Budget Multiplier
Unplanned Investment Spending
AD-AS Model
Lump-sum Taxes
Short-Run Macroeconomic Equilibrium
Automatic Stabilizers
Actual Investment Spending
Discretionary Fiscal Policy
Aggregate Demand Curve
Long-Run Macroeconomic Equilibrium
Wealth Effect of a change in the aggregate price level
Demand Shock

3. Key Formulas
MPC = Δ consumption/ Δ disposable income MPC + MPS = 1 Spending Multiplier = 1/1-MPC Tax Multiplier = -MPC/1-MPC Balanced Budget Multiplier = 1

4. Key Formulas Consumption Function = A + MPC* YD
Output Gap = actual aggregate output – potential output x
potential output

5. Key Graphs
Consumption Function

6. Key Graphs
AD-AS Model

7. Key Concepts Shifts in Aggregate Demand Changes in Expectations
Changes in Wealth
Size of Existing Stock of Physical Capital
Government Policies
Fiscal Policy
Monetary Policy

8. Key Concepts Shifts in Aggregate Supply Changes in Commodity Prices
Changes in Nominal Wages
Changes in Productivity
Changes in Expectations about Inflation

9. Key Concepts
Long-Run Aggregate Supply Represents potential output. A shift of the LRAS to the right represents economic growth. If the economy is operating to the left (below) of the LRAS curve -> recessionary gap. If the economy is operating to the right (above) of the LRAS curve -> inflationary gap. The economy self-corrects in the LR -> know how to trace out and explain self-correcting steps. -> know how to identify appropriate fiscal policy to close these gaps.

10. AP Exam Tips Be able to calculate MPC, MPS and the multiplier.
An increase in unplanned inventory is preceded by a decrease in consumer spending. A decrease in unplanned inventory is preceded by an increase in consumer spending.
Aggregate demand is the demand for all goods and services in the market rather than the demand for one good or service.
Make sure all AD-AS graphs are labeled completely and properly.
Know the wealth and interest rate effects that explain why AD is downward sloping.
Because wages are sticky, they fall very slowly even when the unemployment rate is high. This is important to know when you look at how the economy self-corrects with no government involvement.
A decrease is left, an increase is right when looking at shifts of AD/SRAS/LRAS.
Know all the factors that can shift AD and SRAS.
When asked to graph the effect of a change, graph the first thing that happens in the short-run, unless the question tells you to look at the long-run.
Know how to draw and identify a recessionary and inflationary gap.
Know the ways governments can use fiscal policy to shift aggregate demand – transfers, taxes, and government spending.