AP Macroeconomics Ultimate Guide (copy)

Economics

The study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited material wants.

Scarcity

All factors of production are scarce; the production of goods and services is also scarce due to unlimited needs.

Macroeconomics

The branch of economics that focuses on the economy as a whole, considering large-scale factors like national income and total employment.

Microeconomics

The branch of economics that studies individual agents and their interactions within the economy.

Labor

Human effort and talent, both physical and mental, which can be augmented by education and training.

Land

Any resource created by nature, including arable land, mineral deposits, and natural resources.

Physical capital

Human-made equipment such as machinery, buildings, and technology used for producing goods.

Entrepreneurial ability

The capability to combine various resources to create a productive venture.

Tradition in economies

An economic organization tied to historical subsistence and tribal life.

Command economy

An economic system characterized by central planning by the government.

Market economy

An economic system in which buyers and sellers engage in transactions with minimal government intervention.

Mixed economy

An economic model that incorporates elements of both command and market economies.

Opportunity cost

The value of the next best alternative that is forgone when making a choice.

Trade-off

A situation where in order to gain something, one must give up something else.

Production Possibilities Curve (PPC)

A graphical representation that shows the maximum attainable combinations of two goods that can be produced with available resources.

Constant Opportunity Cost

A situation where the opportunity cost remains the same as more of a good is produced.

Increasing Opportunity Cost

A situation where the opportunity cost rises as more of a good is produced due to resource incompatibility.

Allocative efficiency

A state of the economy where resources are allocated in the most efficient manner to produce the optimal mix of goods and services.

Productive efficiency

A condition where the economy is producing at maximum output with the available resources.

Economic growth

The increase in the capacity of an economy to produce goods and services over time.

GDP (Gross Domestic Product)

The market value of all final goods and services produced within a nation during a specific period.

Aggregate spending

The total spending in the economy, expressed as GDP = C + I + G + (X - M).

Consumer spending (C)

Expenditure by households on goods and services.

Investment spending (I)

Business expenditure on capital goods such as machinery and infrastructure.

Government spending (G)

Government expenditure on goods and services for public use.

Net exports (X - M)

The difference between the value of exports and imports for an economy.

Unemployment rate

The percentage of the labor force that is unemployed and actively seeking employment.

Labor force participation rate

The ratio of the labor force to the total population aged 16 years and older.

Frictional unemployment

Unemployment that occurs when people are between jobs or are entering the labor force for the first time.

Seasonal unemployment

Unemployment that occurs at certain times of the year when demand for labor decreases.

Structural unemployment

Unemployment resulting from industrial reorganization, typically due to technological change.

Cyclical unemployment

Unemployment correlated with the economic cycle, often rising in periods of recession.

Consumer Price Index (CPI)

An index measuring the average change over time in the prices paid by consumers for a market basket of goods and services.

Inflation rate

The percentage increase in the general level of prices for goods and services in an economy over a specific period.

Nominal interest rate

The interest rate before adjustment for inflation.

Real interest rate

The interest rate adjusted for inflation, representing the true cost of borrowing.

Fiat money

Currency that has value by government decree but has no intrinsic value.

Commodity money

A type of money that is based on a physical commodity, such as precious metals or oil.

Monetary policy

The process by which a central bank manages the money supply and interest rates to influence the economy.

Expansionary monetary policy

A monetary policy aimed at increasing the money supply to stimulate economic activity.

Contractionary monetary policy

A monetary policy aimed at decreasing the money supply to combat inflation.

Open market operations

The buying and selling of government securities in the market to control the money supply.

Loanable funds market

The market where borrowers and lenders interact to determine the interest rate and quantity of loans.

Crowding out

The phenomenon where increased government spending leads to a reduction in private sector spending.

Fiscal policy

Government adjustments to spending levels and tax rates to influence a nation's economy.

Budget deficit

The condition when government expenditures exceed its revenues.

Budget surplus

The condition when government revenues exceed its expenditures.

National debt

The total outstanding debt that a government owes to creditors.

Exchange rate

The rate at which one currency can be exchanged for another.

Current account balance

A record of all transactions between a country and the rest of the world involving exports and imports of goods and services.

Capital account balance

A record of the flow of investment capital into and out of a country.

Appreciation of currency

An increase in the value of one currency in relation to another currency.

Depreciation of currency

A decrease in the value of one currency in relation to another currency.

Tariff

A tax imposed on imported goods and services.

Quota

A limit on the amount of a specific good that can be imported into a country.

Foreign exchange market

A global decentralized marketplace for trading national currencies against one another.

Net exports

The value of a country's exports minus its imports.

Capital flow

The movement of money for the purpose of investment, trade, or business production.

Interest rate

The amount charged by a lender to a borrower for the use of borrowed money, typically expressed as a percentage.

Transaction demand

The demand for money for everyday purchases.

Asset demand

The demand for money to hold as a financial asset.

Monetary base (MB)

The total amount of a country's currency in circulations and reserves.

Liquidity

The degree to which an asset or security can be quickly bought or sold in the market without affecting its price.

Investment spending

Expenditures to acquire or upgrade physical assets such as property, industrial buildings, and equipment.

Fiscal stimulus

Tax cuts or government spending intended to stimulate economic activity.

Supply-side policy

Economic policies designed to increase productivity and shift the aggregate supply curve to the right.

Demand-pull inflation

Inflation that occurs when demand for goods and services exceeds supply.

Cost-push inflation

Inflation that occurs due to increases in the cost of production.

Wage-price spiral

A situation in which rising wages cause higher production costs, which leads to price increases, creating a cycle of inflation.

Phillips curve

A graphical representation of the inverse relationship between inflation and unemployment.

Monetary neutrality

The idea that changes in the money supply only affect nominal variables and have no real effects on the economy.

Velocity of money

The rate at which money is exchanged in an economy.

Economic growth

An increase in the production of economic goods and services, compared from one period of time to another.

Aggregate production function

An equation that describes the relationship between input and output in an economy.

Long-run growth

Sustained upward movement in the economy's output over time.

Productivity

The measure of output per unit of input.

Human capital

The economic value of a worker's experience and skills.

Natural resources

Materials or substances occurring in nature which can be exploited for economic gain.

Technological innovation

The introduction of new technologies or methods that improve efficiency and productivity.

Public policy

Government actions intended to address particular issues or goals.

Supply-side fiscal policy

Policies aimed at increasing aggregate supply by reducing taxes or regulations.

Saving rate

The proportion of disposable income that is saved rather than spent.

Fiscal restraint

Policy actions aimed at reducing government spending or increasing taxes to curb budget deficits.

Inflationary gap

The situation in which the actual output is greater than the potential output, leading to inflation.

Recessionary gap

The situation in which the actual output is less than the potential output, indicating economic downturn.

Dynamic shifts

Changes in the economy that impact supply and demand conditions, affecting overall economic activity.

Real GDP per capita

Real GDP divided by the population, indicating average economic output per person.

Investment tax credit

A tax incentive provided to businesses that purchase new capital.