AP Macroeconomics - Unit 5

Vocabulary

Cyclically Adjusted Budget Balance

An estimate of what the budget balance would be if the real GDP were exactly equal to potential output

Fiscal Year

Runs from Oct 1 to Sep 30 and is labeled according to the calender year in which it ends

Public Debt

Government debt held by individuals and institutions outside the government

Debt-GDP Ratio

The government’s debt as a percentage of GDP

Implicit Liabilities

Spending promises made by governmant that are effectively a debt despite the fact that they are not included in the usual debt statistics

Expansionary Monetary Policy

Monetary policy that increases aggregate demand

Contractionary Monetary Policy

Monetay policy that reduces aggregate demand

Money Neutrality

Changes in the money supply have no real effects on the economy

Taylor Rule for Monetary Policy

A rule set the federal funds rate according to the levell of inflation rate either the output gap or the unemplyment rate

Classical Model of Price Level

The real quantity of money is always at its long-run equilibrium level

Inflation Tax

A reduction in the value of money held by the public caused by inflation

Cost-Push Inflation

Inflation that is caused by a significant increase of the price of an output with economy-wide importance

Deman-Pull Infaltion

Inflation that is caused by an increase in aggregate demand

Short-Run Phillips Curve

The negative short-run relationshi[ between the unemployment rate and the inflation rate

Nonaccelerating Inflating Rate of Unemployment (NAIRU)

The unemplyment rate at which inflation does not change over time

Long-Run Philips Curve

Shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience

Debt Deflation

The reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation

Zero Bound

The nominal interest rate cannot go below zero

Liquidity Trap

A situation in which conversational monetary policy is ineffective because nominal interest rates are up against the zero bound

Indexation

When a contract is written such that the terms of the contract are adjustes for changes in inflation

Macroeconomic Policy Activism

The use of monetary and fiscal policy to smooth out the business cycle

Monetarism

Assersts that GDP will grow steadily if the money supply grows steadily

Discretionary Monetary Policy

The use of changes in the interest rate or the money supply to stabilize the economy

Monetary Policy Rule

A formula that determines the central bank’s actions

Quantity Theory of Money

Emphasizes the relationship between the price level and the money supply; it relies on the velocity equation (MV=PY)

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

Natural Rate Hypothesis

To avoid accelerating inflation over time, the unemployment rate must be high enough that the actual inflation rate equals the expected inflation rate

Political Business Cycle

Results when politicians use macroeconomic policy to serve political ends

New Classical Macroeconomics

An approach to the buiness cycle that returns to the classical view that shifts in the aggregate demand curve affect only the aggregate price level, not aggregate output

Rational Expectations

The view that individuals and firms make decisions optimally, using all available information

New Keynesian Economics

Market imperfections that can leaf to [rice stickiness for the economy as a whole

Real Business Cycle Theory

Claims that fluctuations in the rate of growth of total factor productivity cause the business cycle

Monetarists

Believe in a slow steady increase in the money supply equal to the rate of growth of GDP

Rule of 70

number of years it takes for a variable to double = (70/annual growth rate of variable)

(Labor)Productivity

Output/worker

Three Main Reasons for Growth in Productivity

Physical capital, human capital, & technology

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

Diminishing Returns to Physical Capital

A characteristic of an aggregate production function where, holding the amount of human capital and technology constant, each successive increase in the amount of physical capital/worker and human capital/worker as well as the state of technology.

Aggregate Production Function

A hypothetical function that shows how productivity depends on the quantities of physical capital/worker and human capital/worker as well as the state of technology

Effects of Natural Resources

Natural resources can lead to a higher real GDP/capital, all other things equal. Often, all other things aren’t equal

Total Factor Productivity

The amount of output that can be achievec with a given amount of factor inputs.

Infrastrucutre

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

Is World Growth Sustainable?

Most economists think so. Population increases and greenhouse provide complications, but they believe it’s likely that solutions/alternatives will be found. Often, the environmental issues have to do with complicated interactions with the government

Economic Growth Graphically

PPC shifts out. LRAS shifts right