AP Macro Unit 5 Vocab

Fiscal Policy

Fiscal Policy

the use of government purchases of goods and services, government transfers, or tax policy to stabilize the economy

Monetary Policy

actions of a central bank used to stabilize the economy by influencing aggregate demand through changing interest rates

Short-Run Phillips Curve

represents the negative short-run relationship between the unemployment rate and the inflation rate

Long-Run Phillips Curve

shows the relationship between unemployment and inflation after expectations of inflation have has time to adjust to experience

Quantity Theory of Money

emphasizes the positive relationship between the price level and the money supply. It relies on the equation (M x V = P x Y)

Velocity of Money

the ratio of nominal GDP to the money supply. It is a measure of the number of times the average dollar bill is spent per year.

Budget Surplus

exists when tax revenues exceed government spending on goods, services, and transfer payments

Budget Deficit

exists when government spending on goods, services, and transfer payments exceeds tax revenue

Government Debt

the accumulation of past budget deficits, minus the past budget surpluses

Debt to GDP ratio

the government’s debt as a percentage of GDP

Crowding Out

occurs when a government deficit drives up the interest rate and leads to reduced investment spending

Labor Productivity

overall output per worker

Physical Capital

consists of human-made goods such as buildings and machines used to produce other goods and services

Human Capital

the improvement in labor created by the education and knowledge of members of the workforce

Technology

the technical means for the production of goods and services

Aggregate Production Function

a function that shows how aggregate output depends on the stock of physical capital and the quantity and quality of labor resources, as well as the state of technology

Diminishing Returns to Physical Capital

exists when holding the quantity and quality of labor and technology fixed, each successive increase in the amount of physical capital leads to a smaller increase in productivity

Depreciation

occurs when the value of a physical asset is reduced by wear, age, or obsolescence

Infrastructure

Roads, power lines, ports, information networks, and other underpinnings for economic activity

Supply-Side Fiscal Policies

government policies that seek to promote economic growth by affecting short-run and long-run aggregate supply

Incentive

a reward or punishment that motivates particular choices. In supply-side policy, there are motivation for households and businesses to work, save, and invest