AP MACROECONOMICS ALL TERMS UNITS 1-6

Scarcity

The limited nature of society’s resources, given unlimited wants.

Opportunity Cost

The value of the next best alternative foregone when a choice is made.

Trade-offs

All the alternatives given up when a decision is made.

Marginal Analysis

Comparing additional benefits and additional costs when making decisions.

Production Possibilities Curve (PPC)

A graph showing the maximum combinations of goods/services that can be produced with fixed resources.

Efficiency

Using resources in a way that maximizes the production of goods and services.

Underutilization

When an economy is not using all its resources efficiently.

Law of Increasing Opportunity Cost

As production of a good increases, the opportunity cost of producing an additional unit rises.

Absolute Advantage

The ability to produce more of a good with the same resources.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer.

Specialization

Concentrating production on one or a few goods to increase efficiency and trade benefits.

Terms of Trade

The rate at which one good is exchanged for another between countries.

Economic Systems

The way a society organizes the production, distribution, and consumption of goods.

Capital Goods

Goods used to produce other goods (e.g., machinery).

Consumer Goods

Goods produced for personal consumption.

Factors of Production

The resources used to produce goods

Land

Natural resources used in production.

Labor

Human effort used in production.

Capital

Man-made tools, machines, and buildings used in production.

Entrepreneurship

The initiative to combine resources and take risks to create new products or businesses.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a country in a year.

Nominal GDP

GDP measured in current prices, not adjusted for inflation.

Real GDP

GDP adjusted for inflation.

GDP Deflator

A measure of the price level used to convert nominal GDP into real GDP.

Expenditure Approach

Calculates GDP by adding consumption, investment, government spending, and net exports.

Income Approach

Calculates GDP by adding all incomes earned (wages, rents, interests, and profits).

Business Cycle

The fluctuations in economic activity over time—expansion, peak, contraction, trough.

Expansion

A period of rising GDP and economic growth.

Contraction

A period of declining GDP and economic slowdown.

Peak

The highest point before a contraction in the business cycle.

Trough

The lowest point before an expansion begins.

Recession

Two consecutive quarters of negative GDP growth.

Depression

A prolonged and severe recession.

Unemployment

The percentage of the labor force that is jobless and actively seeking work.

Natural Rate of Unemployment (NRU)

The level of unemployment when the economy is at full employment (includes frictional + structural).

Frictional Unemployment

Temporary unemployment as people move between jobs.

Structural Unemployment

Unemployment due to changes in the structure of the economy.

Cyclical Unemployment

Unemployment caused by economic downturns.

Labor Force

The sum of employed and unemployed individuals actively seeking work.

Labor Force Participation Rate

The percentage of the adult population that is in the labor force.

Aggregate Demand (AD)

The total demand for goods and services in an economy at all price levels.

Components of AD (C + I + G + NX)

Consumption + Investment + Government Spending + Net Exports.

Aggregate Supply (AS)

The total supply of goods and services that firms are willing to produce at different price levels.

Short-Run Aggregate Supply (SRAS)

AS when input prices are sticky; reflects short-term production.

Long-Run Aggregate Supply (LRAS)

AS when all prices are flexible; vertical at full employment output.

Output Gap

The difference between actual output and potential output.

Recessionary Gap

When actual GDP is less than potential GDP.

Inflationary Gap

When actual GDP exceeds potential GDP.

Full Employment Output

The level of GDP where all resources are fully employed.

Multiplier Effect

The magnified impact of a spending change on total output.

Spending Multiplier

1 / (1 - MPC); shows how initial spending leads to more total spending.

Tax Multiplier

-MPC / (1 - MPC); the impact of a tax change on GDP.

Marginal Propensity to Consume (MPC)

The fraction of additional income that is spent.

Marginal Propensity to Save (MPS)

The fraction of additional income that is saved.

Balanced Budget Multiplier

Equal to 1; a change in government spending matched by a change in taxes has a direct impact on GDP.

Sticky Wages

Wages that don’t adjust quickly to changes in labor market conditions.

Sticky Prices

Prices that don’t change immediately in response to economic shifts.

Demand-Pull Inflation

Inflation caused by an increase in aggregate demand.

Cost-Push Inflation

Inflation caused by a decrease in aggregate supply (rising costs).

Stagflation

A situation with stagnant growth and inflation occurring simultaneously.

Money

Anything generally accepted as a medium of exchange.

Medium of Exchange

An item used to facilitate transactions.

Store of Value

Something that keeps its value over time.

Unit of Account

A standard numerical unit of measurement of market value.

M1 Money Supply

Currency, demand deposits, and checkable deposits (most liquid).

M2 Money Supply

M1 plus savings deposits, small time deposits, and money market funds.

Demand for Money

The desire to hold liquid assets instead of investing.

Supply of Money

Determined by the central bank; vertical on a graph.

Nominal Interest Rate

The reported interest rate not adjusted for inflation.

Real Interest Rate

The nominal rate minus inflation.

Loanable Funds Market

The market that shows the supply and demand for loanable funds.

Money Market

A model showing the interaction of the money supply and money demand.

Bonds

Financial assets representing a loan made by an investor to a borrower.

Present Value

The current worth of a future sum of money.

Future Value

The amount an investment is worth after one or more periods.

Reserve Requirement

The minimum fraction of customer deposits banks must hold in reserve.

Required Reserves

The actual amount banks are required to hold.

Excess Reserves

Reserves held beyond the required minimum.

Discount Rate

The interest rate the Fed charges banks for short-term loans.

Money Multiplier

1 / Reserve Requirement; shows how much the money supply can increase.

Inflation

A general rise in prices across the economy.

Deflation

A general fall in prices.

Disinflation

A decrease in the rate of inflation.

Consumer Price Index (CPI)

Measures the average price of a fixed basket of goods/services.

Producer Price Index (PPI)

Measures the average change in prices received by producers.

Fiscal Policy

Government policy on taxation and spending to influence the economy.

Expansionary Fiscal Policy

Increasing spending or cutting taxes to stimulate the economy.

Contractionary Fiscal Policy

Decreasing spending or raising taxes to slow the economy.

Government Spending

Expenditures by the public sector on goods and services.

Taxation

The method by which governments finance expenditures.

National Debt

The total amount of money the government owes.

Budget Surplus

When government revenues exceed expenditures.

Budget Deficit

When government expenditures exceed revenues.

Monetary Policy

Central bank actions to control the money supply and interest rates.

Federal Reserve (Fed)

The central bank of the United States.

Open Market Operations (OMO)

The buying/selling of government securities by the Fed to influence money supply.

Federal Funds Rate

The interest rate at which banks lend reserves to each other overnight.

Phillips Curve

Shows the inverse relationship between inflation and unemployment.

Short-Run Phillips Curve

Inverse tradeoff between inflation and unemployment.

Long-Run Phillips Curve (LRPC)

Vertical at the natural rate of unemployment.