AP ECON UNIT 5 VOCAB

Prince Li

Cyclically adjusted budget balance

The government's budget balance adjusted to remove the effects of the economic cycle, showing what the balance would be if the economy were at full employment.

Fiscal year

A 12-month period used for budgeting, accounting, and financial reporting, which does not necessarily align with the calendar year.

Public debt

The total amount of money owed by the government as a result of borrowing to finance past budget deficits.

Debt-GDP ratio

A measurement of a country's public debt in relation to its gross domestic product, used to assess fiscal health.

Implicit liabilities

Promises of future government spending that are not legally binding obligations, such as future pension or healthcare benefits.

Target federal funds rate

The interest rate the Federal Reserve aims to achieve in the overnight lending market between banks, used as a key monetary policy tool.

Expansionary monetary policy

Actions by a central bank to increase the money supply or lower interest rates to stimulate economic activity.

Contractionary monetary policy

Central bank actions to decrease the money supply or raise interest rates to reduce inflation or slow down an overheating economy.

Taylor rule for monetary policy

A formula that suggests how central banks should set interest rates based on changes in inflation and economic output.

Inflation targeting

A central bank policy strategy that aims to keep inflation around a publicly announced target rate.

Monetary neutrality

The idea that changes in the money supply only affect nominal variables (like prices and wages) in the long run, not real output.

Classical model of the price level

A model which assumes that the real economy is not affected by the price level in the long run, and that prices are flexible.

Inflation tax

The reduction in the purchasing power of money held by the public due to inflation, which acts like a tax.

Cost-push inflation

Inflation caused by a rise in the costs of production (like wages or raw materials), which leads firms to raise prices.

Demand-pull inflation

Inflation that occurs when aggregate demand in an economy outpaces aggregate supply.

Short-run Phillips Curve

A curve showing an inverse relationship between inflation and unemployment in the short run.

Nonaccelerating inflation rate of unemployment (NAIRU)

The unemployment rate at which inflation remains stable; any lower and inflation tends to accelerate.

Long-run Phillips Curve

A vertical line showing that in the long run, there is no trade-off between inflation and unemployment.

Debt deflation

A situation where falling prices increase the real burden of debt, potentially worsening economic downturns.

Zero bound

The lower limit for nominal interest rates, generally considered to be zero, beyond which conventional monetary policy becomes ineffective.

Liquidity trap

A situation where monetary policy becomes ineffective because interest rates are near zero and people hoard cash instead of spending or investing.

Macroeconomic policy activism

The use of monetary and fiscal policies to actively manage economic fluctuations and stabilize the economy.

Monetarism

An economic theory that emphasizes the role of governments in controlling the money supply to control inflation and stabilize the economy.

Discretionary monetary policy

Central bank actions based on judgment and current economic conditions rather than fixed rules.

Monetary policy rule

A guideline for central banks to follow in setting interest rates, such as the Taylor rule.

Quantity theory of money

The theory that changes in the money supply directly affect the price level when velocity and output are constant.

Velocity of money

The rate at which money circulates in the economy, calculated as nominal GDP divided by the money supply.

Natural rate hypothesis

The idea that there is a specific level of unemployment consistent with a stable inflation rate, and that attempts to reduce unemployment below this rate will lead to accelerating inflation.

Political business cycle

The theory that politicians manipulate the economy (e.g., through expansionary policies) before elections to increase their chances of reelection.

New classical macroeconomics

A school of thought that emphasizes rational expectations and market clearing, arguing that government policy is often ineffective.

Rational expectations

The assumption that individuals and firms make decisions optimally using all available information, including understanding of policies.

New Keynesian economics

A school of thought that incorporates microeconomic foundations and price/wage rigidities into Keynesian models, supporting policy interventions.

Real business cycle theory

A theory that economic fluctuations result from real (not monetary) shocks, like changes in technology or productivity.

Rule of 70

A formula to estimate the number of years it takes for a variable (like GDP) to double, found by dividing 70 by the annual growth rate.

Labor productivity

The output produced per unit of labor, often measured as output per hour worked.

Physical capital

Tangible assets like machinery, buildings, and equipment used in production.

Human capital

The skills, knowledge, and experience possessed by individuals, contributing to their productivity.

Technology

The application of scientific knowledge and innovations to improve production processes and efficiency.

Aggregate production function

A mathematical representation of how inputs like capital, labor, and technology combine to produce output in the economy.

Diminishing returns to physical capital

The principle that as more physical capital is added, holding other inputs constant, the additional output produced from each additional unit of capital decreases.

Growth accounting

A method to determine the contribution of different factors (like labor, capital, and technology) to economic growth.

Total factor productivity

A measure of productivity that accounts for the output not explained by inputs, often attributed to technological progress.

Convergence hypothesis

The theory that poorer economies will tend to grow faster than richer ones, leading to a convergence in income levels over time.

Research and development (R&D)

Activities undertaken to innovate and improve products, processes, or services, which contribute to technological progress.

Infrastructure

Basic physical systems like transportation, communication, and utilities that support economic activity.

Sustainable

The ability to maintain economic growth without depleting natural resources or causing environmental harm.

Depreciation

The decline in the value of an asset over time due to wear, obsolescence, or aging.