AP Macroeconomics Unit 5-6

budget deficit

government’s tax revenue < government spending

• if the gov’t increases spending w/o increasing taxes, the deficit and national debt will increase

budget surplus

government’s tax revenue > government spending

crowding out

government’s increased borrowing makes it harder for the public to borrow money, usually because of increasing interest rates

phillip’s curve theory

inflation rate and unemployment rate are inversely related

changes that affect the SRPC

• change in AD: movement along SRPC | opposite direction of AD

• change in SRAS: shift of SRPC in opposite direction of SRAS shift

• change in inflation rate/price level: shift SRPC to meet new expected inflation rate

long-run phillip’s curve

drawn vertically - implies that in the long run, there actually isn’t any relationship between inflation rate and unemployment rate

disinflation

a decrease in deflation, meaning there is less inflation than befored

deflation

negative inflation (prices are falling)

quantity theory of money

the amount of money in circulation is equal to the total value of all goods and services sold (nominal GDP)

equation of exchange

MV = PY

money supply x velocity of money = price level x real GDP

what does the quantity theory of money tell us about the relationship between the money supply and output + inflation rate?

• money growth > output growth — inflation (price levels rise)

• money growth = output growth — prices remain stable

aggregate production function

shows that productivity is tied to quantities of capital per worker as well as changes in tech

economic growth

an increase in real GDP per capita over time, allowing for permanent changes in output and productivity

• show by an outward shift on the PPC and LRAS

what causes economic growth?

increase in productivity, such as increased use of capital stock or investment spending

what policies can the government use to encourage economic growth?

the government can improve:

1. human capital per worker

2. technology

3. physical capital per worker

exchange rates

the price of a currency in terms of another currency

current account

records net exports (X-M), net foreign investments (passive $ made off of investments) and net transfers (remittances)

capital/financial account

records the purchase and sale of foreign assets (physical and financial)

trade surplus

selling more goods to other countries than other countries sell them

• exports > imports

trade deficit

buying more goods from other countries than other countries buy from them

• imports > exports (we have a lot of $$)

free trade

trade w/o tariffs, quotas, or restrictions

protectionism

shielding a country’s domestic industries from foreign competition by taxing imports

appreciation

the currency’s value increases relative to another country’s currency

• goods become more expensive relative to foreign countres

  • exports  ↓ / imports ↑

depreciation

the currency’s value decreases relative to another country’s currency

• goods become cheaper relative to foreign countries

  • exports ↓ / imports ↑

capital inflow

money flows into the economy (exports)

capital outflow

money flows out of the economy (imports)

five reasons for limiting trade

• protecting domestic employment

• protecting consumers

• infant industries

• national security

• retaliation

what is the relationship between current and capital/financial account?

the current account and CFA must offset each other — one is in a surplus while the other is in a deficit