AP Macroeconomics Flashcards

Flashcards covering definitions and formulas from the AP Macroeconomics Table of Information.

Opportunity cost

The value of the next best alternative to any decision you make

Production possibilities curve (PPC)

A graphical model that represents all of the different combinations of two goods that can be produced; the PPC captures scarcity of resources and opportunity costs.

Surplus

When the quantity supplied of a good, service, or resource is greater than the quantity demanded

Shortage

When the quantity demanded of a good, service, or resource is greater than the quantity supplied

Demand

An economic principle referring to a consumer's desire to purchase goods and services and willingness to pay a price for a specific good or service

Supply

Describes the total amount of a specific good or service that is available to consumers

Equilibrium

In a market setting, an equilibrium occurs when price has adjusted until quantity supplied is equal to quantity demanded

Disequilibrium

In a market setting, disequilibrium occurs when quantity supplied is not equal to the quantity demanded; when a market is experiencing a disequilibrium, there will be either a shortage or a surplus.

GDP

Measures the value of the output of all goods and services produced within the country in a year

Nominal GDP

The market value of the final production of goods and services within a country in a given period using that year’s prices (also called “current prices”)

Real GDP

Nominal GDP adjusted for changes in the price level, using prices from a base year (constant prices) instead of “current prices” used in nominal GDP; real GDP adjusts the level of output for any price changes that may have occurred over time

GDP deflator

A price index used to adjust nominal GDP to find real GDP; the GDP deflator measures the average prices of all finished goods and services produced within a nation’s borders over time.

Unemployment rate

When people are not working, but they are actively looking for work; for example, Glenn did not work at all last week, though he tried to find a job, so he is considered unemployed.

Labor force participation rate

the percentage of the eligible population that is in the labor force

CPI

An index that calculates the cost of a market basket of goods purchased by a typical family that lives in an urban area; the purpose of the CPI is to track changes in the cost of living over time.

Inflation rate

The pace at which the overall price level is increasing; this is the percentage increase in the price level from one period to the next.

Circular flow model

GDP can be represented by the circular flow diagram as a flow of income going in one direction and expenditures on goods, services, and resources going in the opposite direction. In this diagram, households buy goods and services from businesses and businesses buy resources from households.

AD-AS model

The AD-AS (aggregate demand-aggregate supply) model is a way of illustrating national income determination and changes in the price level. We can use this to illustrate phases of the business cycle and how different events can lead to changes in two of our key macroeconomic indicators: real GDP and inflation.

Fiscal policy

The use of taxes, government spending, and government transfers to stabilize an economy; the word “fiscal” refers to tax revenue and government spending.

Nominal interest rate

The interest rate that you earn (or pay) on a loan; this is the amount you see on a sign advertising interest rates.

Real interest rate

The nominal interest rate adjusted for inflation; this is the effective interest rate that you earn (or pay).

Money multiplier

The ratio of the money supply to the monetary base (money in bank vaults and money in circulation); the money multiplier tells us how many additional dollars will be created with each addition to the monetary base, such as when there is a $1$1dollar sign, 1 increase in a bank’s reserves.

Nominal interest rate

real interest rate + expected inflation

Real interest rate

nominal interest rate - inflation rate

Exchange rate

of units of currency B / unit of currency A