AP Macroeconomics Flashcards

Flashcards for AP Macroeconomics review.

Marginal benefits:

What you gain from obtaining one more unit of good/service

Marginal costs:

What you pay for obtaining one more unit of good/service

Ceteris paribus:

Holding all other variables constant, examining the effect of changing one variable

Scarcity:

When goods are limited in quantity, but there is unlimited want

Opportunity cost:

The loss of potential gain from other alternatives when one alternative is chosen

Types of resources:

Land, labor, capital (raw goods, machines, capital stock, tech, money), entrepreneurship

Free market (capitalist economy):

People make their own choices; prices determine value/trade

Command economy:

Government decides who gets what

PPC:

Shows the opportunity cost of using scarce resources for one product vs another

PPC that’s linear:

Has a CONSTANT opportunity cost per unit for the goods

PPC that’s concave to the origin has an INCREASING opportunity cost per unit for the goods:

Explained by the “law of increasing opportunity cost”

Zero opportunity cost per unit of the good:

Vertical line (does not take any more of good A to produce more of good B)

A point on PPC is:

An economy in full employment

ECONOMIC GROWTH:

Happens due to IMPROVED TECH, EDUCATION IMPROVEMENTS, and NEW RESOURCES

A point below the curve is achieved when people in BOTH industries are inefficient or unable to work:

Indicates a recession

DEMAND GRAPH:

Price on y-axis, quantity on x-axis, SLOPED DOWNWARDS

SHIFT OUTWARD in a demand graph:

More demand, meaning more output AND higher price

SHIFT INWARD in a demand graph:

Less demand, meaning less input AND lower price

For Y amount of money:

Able to get X amount of stuff

If people have LESS INCOME meaning LESS DEMAND:

WHOLE DEMAND SHIFTS (more income, meaning more demand)

What shifts demand?

Consumer tastes; Income levels; Prices of COMPLEMENTARY GOODS; Prices in SUBSTITUTE GOODS; Consumer expectations; Number of consumers

SUPPLY GRAPH:

Price on y-axis, quantity on x-axis, SLOPED UPWARDS

SHIFT OUTWARD in a supply graph:

More supply, meaning more output AND lower price

SHIFT INWARD in a supply graph:

Less supply, meaning less input AND higher price

Anything beyond just price is shift in supply curve, shifted by:

Change in input prices (cost of production); Changes in taxes; Price of other goods

Absolute advantage:

Simply outputting more of a good in a certain amount of time than another

Comparative advantage:

Outputting more of a good in a way that makes for the least opportunity cost

Full employment:

Exists when most individuals who are willing to work and able to are employed

Price stability:

Is the average level of prices not changing

Economic growth:

Exists when there is increasing output of goods and services

What is NOT counted in GDP (total market value of final goods and services produced in a country):

Secondary sales (Craigslist, garage sales); Transfer payments (welfare, gifts, social security); Illegal goods; Intermediate goods (oranges to make orange juice); Financial transactions (sale of existing stocks, moving money to new accounts, sale of existing home, only initial public offering counts)

GDP (expenditure approach) = C + I + G + X

Stuff bought by households (biggest) (includes rent because that is a service); Investment: stuff bought by businesses (construction + homes); Government: stuff bought by the government; Net exports: exports - imports (rent counts in GDP)

GDP (income approach):

Wages + rent + interest + profit + statistical adjustments = national income

Inflation:

Rise in OVERALL price levels, DECREASE in value of money

Deflation:

Decrease in OVERALL price levels, INCREASE in value of money

Anticipated inflation:

Inflation that is expected, used to make decisions (worker will demand higher wages to keep purchasing power the same if prices are expected to rise in the market); people aren’t hurt or helped because money can still buy same amount of stuff

Unanticipated inflation:

Inflation was not expected, INCREASE IN INFLATION makes for debtors to WIN and creditors to LOSE (debtors win because they have to pay less because same amount of money on paper, but money is worthless, creditors lose because they get the same amount of money on paper, but the money is worthless)

Price index:

Used to measure price changes in the economy

CPI =

(cost of market basket in current-year prices)/(cost of market basket in base-year prices) * 100

Percent change for CPI =

Change in CPI / beginning CPI * 100

How to calculate unemployment:

Unemployed / labor force * 100 (to find %)

Labor force participation rate (LFPR) is:

Labor force/population * 100

Labor force =

16 years, able to work, wants work; employed, underemployed - part time but want full time, not working to full potential, unemployed - actively looking

Frictional unemployment:

Hate job, get fired

Structural unemployment:

System-wide change (VHS repairman)

Cyclical unemployment:

Due to recession/depression

Nominal values:

Values that increase or decrease with the price level; prices are as stated, useless for comparison of prices

Real values:

Adjusted for price changes; prices that take inflation into account, set in some chosen “base year”

Real GDP =

Nominal GDP / (price index / 100)

Percent change for GDP =

Change in GDP / beginning GDP * 100

Shoe leather costs:

Inflation causing more trips to the bank or store

Menu costs:

Raising prices so must print new advertisements, or new price labels

Unit of account costs:

You remember when something used to cost less to buy the same thing (spend more to get the same amount of groceries)

Aggregate demand:

Is the relationship between real GDP and price level

Negative slope in aggregate demand means:

As price level increases, real GDP decreases; as price level decreases, real GDP increases

When price level changes:

When price level changes, consumers affected - wealth effect; movement along the curve

The interest rate effect:

When interest rates paid by consumers change - interest rate effect

The net export effect:

When the prices of domestic goods vs imported goods change - net export effect

INCREASE in AD (shift right):

Real GDP increase, price level increase

DECREASE in AD (shift left):

Real GDP decrease, price level decrease

Things that can shift AD:

Increase in optimism and wealth; Low stock (pay less); Tax cuts or increase in gov spending; Bank has more money

Investment demand:

Any increase in investment spending will increase GDP and AD

Short-run aggregate supply (SRAS):

Is relationship between real GDP and price level

Positive relationship in SRAS:

Producers seek to maximize profits and production costs are inflexible

INCREASE in AS (shift right):

Real GDP increase, price level decrease

DECREASE in AS (shift left):

Real GDP decrease, price level increase

Short-run:

One factor is fixed (EX: price of inputs remains fixed, or sticky, while the price of output increases when price level increases, decreases when price decreases).

Long run:

Time when input prices adjust to changes in the overall price level (inflation)

CGIX shifts the AD curve:

Increase in anything in CGIX increases AD curve

AS curve:

Only shifted when there are changes in the price of inputs or changes in productivity

Inflation:

Higher demand means higher inflation

Long run is when:

Input price has time to catch up to output price; wages and prices fully flexible; no overall effect; output prices GO UP BECAUSE OF INFLATION, eventually, input prices and wages catch up to the output prices to make LONG RUN vertical

LRAS vertical at full employment output:

Curve represents point on PPC graph - outward shift in PPC means outward shift in LRAS

Short run phillips curve:

Unemployment (x) vs inflation (y); Always negative slope

Long run phillips curve:

In long run, no trade off between inflation and unemployment

Initial change in components of AD:

Will lead to changes in the economy, larger final change in GDP

The marginal propensity to consume:

The amount of additional spending that results when households receive additional income, fraction spent of any change in disposable income (ΔC / ΔDI)

The marginal propensity to save:

Fraction saved of any change in disposable income (ΔS / ΔDI)

MPC + MPS:

Always add up to 1

APC is the average propensity to consume:

Total income households spend / disposable income (C / DI)

APS is the average propensity to save:

Total income households save / disposable income (S / DI)

SPENDING MULTIPLIER:

1 / (1 - MPC); Change in AD component * spending multiplier = change in GDP; Used when there is a change in a component of AD

TAX MULTIPLIER:

• MPC / MPS; Change in taxes * tax multiplier = change in GDP; Used when there is a change in lump-sum taxes

AD shifts to the right if the government spends or taxes are cut:

Move towards full employment

AD shifts to the left if the government decreases spending or increases taxes:

Move toward a lower employment

Expansionary fiscal policy:

Increases employment, increases output, can raise price levels, increase budget deficits

Contractionary fiscal policy:

Decreases employment, decreases output, can decrease price levels, increase budget surpluses

GOAL:

Stabilize the economy - promoting full employment and stable prices

AUTOMATIC STABILIZER:

Happens automatically as economic situation changes

SRAS:

Affected by changes in economy-wide input prices (wages, the price of oil) and productivity

LRAS:

Affected by technological advancements, more available resources, higher quality resources

Budget deficit:

SUM of past deficits = DEBT, which is subject to annual interest charges

EXPANSIONARY:

Raise gov spending, lower taxes, higher deficit, lower surplus, higher debt, higher interest rate; can close a recessionary gap

CONTRACTIONARY:

Decrease gov spending, raise taxes, lower deficits, higher surplus, lower debt, lower interest rate

Crowding out:

Government borrows to pursue expansionary fiscal policy, replaces private borrowing and spending; part of the increase in AD from increased gov spending is offset by decrease in AD from decreased consumption and investment

Government reduces income tax rate on interest income ->

Consumers want to save more -> more supply

Keynesian Economics:

Refers to using active government policy to manage aggregate demand in order to address or prevent economics; active fiscal and monetary policy

Equilibrium for the Keynesian model:

Referes to when opposing forces of aggregate expenditures equal to aggregate production and achieve a balance with no inherent tendency for change

Money:

Generally accepted in payment for goods and services

Good medium of exchange requirements:

Accepted by people when they buy and sell; Portable; Divisible; Uniform