Chapter 3 + 4 AP Macro Vocabulary

real wealth effect

the change in consumer spending caused by the altered purchasing power of consumers' assets

interest rate effect

the change in investment and consumer spending caused by altered interest rates that result from changes in the demand for money

exchange rate effect

the change in net exports caused by a change in the value of the domestic currency, which leads to a change in the relative price of domestic and foreign goods and services

Marginal Propensity to Consume (MPC)

the increase in consumer spending when disposable income rises by $1

Marginal Propensity to Save

the increase in household savings when disposable income rises by $1

Expenditure Multiplier

equal to 1/(1

Tax Multiplier

equal to

sticky wages

nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages

the short run

shows the positive relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run

The Long Run

shows the relationship between the aggregate price level and the quantity of aggregate output supplied if all prices including nominal wages were fully flexible

Output Gap

the percentage difference between actual aggregate output and potential output

Recessionary Gap

when aggregate output is below potential output

Inflationary Gap

when aggregate output is above potential output

Demand Shock

an event that shifts the aggregate demand curve

Cost

Push Inflation

Supply Shock

an event that shifts the short

Stagflation

the combination of inflation and falling aggregate output

Demand

Pull Inflation

Fiscal Policy

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

Expansionary Fiscal Policy

fiscal policy that increases aggregate demand to close a recessionary gap

Contractionary Fiscal Policy

fiscal policy that reduces aggregate demand to close an inflationary gap

Balanced Budget Multiplier

the factor by which a change in both spending and taxes changes real GDP

Discretionary Fiscal Policy

fiscal policy that is the result of deliberate actions by policy makers rather than rules

Wealth

the value of a household's accumulated savings

Liability

a requirement to pay money in the future

Liquid

describes an asset if it can be quickly converted into cash without much loss of value

Bond

an interest

Stock

type of equity that represents ownership of a company

Nominal Interest Rate

the interest rate actually paid for a loan

Real Interest rate

the nominal interest rate minus the rate of inflation (nominal interest rate is adjusted for inflation)

Money

any asset that can easily be used to purchase goods and services

Money Supply

the total value of financial assets in the economy that are considered money

Medium of Exchange

an asset that individuals acquire for the purpose of trading goods and services rather than for their own consumption

Unit of Account

a measure used to set prices and make economic calculations

Store of Value

a means of holding purchasing power over time

Commodity Money

a good used as a medium of exchange that has intrinsic value in other uses

Commodity

Backed Money

Fiat Money

a medium of exchange whose value derives entirely from its official status as a means of payment

M1

monetary aggregate that include currency in circulation, checkable bank deposits, and other liquid deposits

M2

monetary aggregate that includes M1 plus less liquid "near monies" (financial assets that can be readily converted into cash)

Open Market Operations

the purchase or sale of bonds by a central bank

Inflation Targeting

when the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target

Expansionary Monetary Policy

monetary policy that increases aggregate demand

Contractionary Monetary Policy

monetary policy that reduces aggregate demand

Federal Funds Rate

the interest rate that banks charge other banks for loans, as determined in the federal funds market

Discount Rate

the interest rate the central bank charges on loans to banks

Loanable Funds Market

a hypothetical market that brings together those who want to lend money and those who want to borrow money

Crowding Out

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