AP macro

Fiscal Policy

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

Monetary Policy

Actions of a central bank used to stabilize the economy by influencing aggregate demand through changing interest rates.

Short-Run Phillips Curve

Represents the negative short-run relationship between the unemployment rate and the inflation rate.

Long-Run Phillips Curve

Shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust.

Quantity Theory of Money

Emphasizes the positive relationship between the price level and the money supply, represented by the equation (M x V = P x Y).

Velocity of Money

The ratio of nominal GDP to the money supply, measuring how often the average dollar bill is spent per year.

Budget Surplus

Exists when tax revenues exceed government spending on goods, services, and transfer payments.

Budget Deficit

Exists when government spending on goods, services, and transfer payments exceeds tax revenue.

Government Debt

The accumulation of past budget deficits minus the past budget surpluses.

Debt to GDP ratio

The government’s debt as a percentage of GDP.

Crowding Out

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

Labor Productivity

Overall output per worker.

Physical Capital

Human-made goods such as buildings and machines used to produce other goods and services.

Human Capital

The improvement in labor created by the education and knowledge of members of the workforce.

Technology

The technical means for the production of goods and services.

Aggregate Production Function

A function that shows how aggregate output depends on the stock of physical capital and the quantity and quality of labor resources, as well as the state of technology.

Diminishing Returns to Physical Capital

Exists when holding the quantity and quality of labor and technology fixed, each successive increase in physical capital leads to a smaller increase in productivity.

Depreciation

Occurs when the value of a physical asset is reduced by wear, age, or obsolescence.

Infrastructure

Roads, power lines, ports, information networks, and other underpinnings for economic activity.

Supply-Side Fiscal Policies

Government policies that seek to promote economic growth by affecting short-run and long-run aggregate supply.

Incentive

A reward or punishment that motivates particular choices; in supply-side policy, there are motivations for households and businesses to work, save, and invest.