AP Econ

Resources or Factors of Production

Includes labor, land, physical capital, and entrepreneurial ability (CELL).

Organizations of Society

Tradition, command, market, and mixed are different ways societies organize their economies.

Opportunity Cost

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

Trade-Offs

Decisions made due to scarce resources, affecting individuals, firms, and governments.

Production Possibilities Curve

A model showing the allocation of scarce resources between two goods or services.

Efficiency

Productive efficiency, allocative efficiency, optimal output, and market failure are key concepts.

Growth

Economic growth and contraction, influenced by resource increase, quality improvement, and technological advancements.

Comparative Advantage and Trade

Absolute advantage, comparative advantage, terms of trade, and specialization in trade.

Demand

Law of demand, change in quantity demanded vs. change in demand, and determinants of demand.

Supply

Law of supply, quantity supplied vs. supply, and determinants of supply.

Market Equilibrium

The market equilibrium price where buyers and sellers match, and market disequilibrium when there is a shortage or surplus.

Market shortage

Also known as excess demand, a shortage exists when the quantity demanded exceeds the quantity supplied, leading to a rise in price to eliminate the shortage.

Market surplus

Also known as excess supply, a surplus exists when the quantity supplied exceeds the quantity demanded, causing a fall in price to eliminate the surplus.

Increase in demand

When demand rises while supply remains constant, equilibrium price and quantity increase.

Decrease in demand

When demand decreases while supply is constant, equilibrium price and quantity decrease.

Increase in supply

When supply increases while demand remains constant, equilibrium price decreases, and quantity increases.

Decrease in supply

When supply decreases while demand is constant, equilibrium price increases, and quantity decreases.

Circular flow of economic activity

A model showing how households and firms circulate resources, goods, and incomes through the economy, expanded to include the government and foreign sector.

GDP (Gross Domestic Product)

The market value of final goods and services produced within a nation in a given period, calculated as the sum of consumer spending, investment spending, government spending, and net exports.

Unemployment rate

The percentage of the labor force that falls into the unemployed category, calculated as 100 times the number of unemployed individuals divided by the labor force.

Consumer Price Index (CPI)

A price index measuring the average price level of items in the base year market basket, used as the main measure of consumer inflation.

Real GDP

The value of current production using prices from a fixed point in time, allowing comparison across different years.

Base year

The reference year for constructing a price index and comparing real values over time.

Price index

A measure comparing the average level of prices in a given year to a base year, indicating the current price level as a percentage of the base year.

Business cycle

The periodic rise and fall in economic activity, measured by changes in real GDP.

Aggregate demand (AD)

The total spending on domestic output in relation to the aggregate price level, consisting of consumption, investment, government purchases, and net exports.

Components of AD

The sources of demand in the macroeconomy, including consumption, investment, government spending, and net exports.

Spending multiplier

The measure of the effect that a change in government spending has on the Gross Domestic Product of a country.

Tax multiplier

The measure of the effect that a change in taxes has on spending and the economy.

Short-Run Aggregate Supply (SRAS)

The positive relationship between the level of domestic output produced and the aggregate price level in the short run.

Long-Run Aggregate Supply (LRAS)

The number of goods and services an economy can produce with full employment of resources in the long run.

Policy incentives

Large incentives provided by policies to quickly find a job or invest in capital/technology leading to a rise in full-employment real GDP.

LRAS curve

A rightward shift indicating economic growth.

Macroeconomic equilibrium

Quantity of real output demanded equals the quantity of real output supplied, occurring at the intersection of AD and SRAS.

Recessionary gap

The amount by which full-employment GDP exceeds equilibrium GDP.

Inflationary gap

The amount by which equilibrium GDP exceeds full employment GDP.

Supply shocks

Economy-wide events affecting firm costs and the SRAS curve position, positively or negatively.

Expansionary fiscal policy

Increases in government spending or lower net taxes to shift AD to the right during a recession.

Contractionary fiscal policy

Decreases in government spending or increases in net taxes to shift AD to the left beyond full employment to control inflation.

Sticky prices

Prices that do not adjust downward with changes in AD, as believed by Keynesians.

Automatic stabilizers

Fiscal policies in place to counter economic fluctuations, like income taxes and anti-poverty programs.

Financial assets

Investments yielding a rate of return, including stocks, bonds, loans, and bank deposits.

Nominal v/s Real Interest Rates

Nominal rates not adjusted for inflation, while real rates are; real rate = nominal rate - inflation.

Types of Money

Fiat money (paper/coin) and commodity money (with non-monetary use).

Functions of Money

Medium of exchange, unit of account, and store of value.

Money supply

Quantity of money in circulation measured by the Fed as M1 (cash, coins, deposits) and M2 (M1 + savings, deposits, funds).

Monetary Base (MO/MB)

The total sum of currency in circulation and bank reserves, representing the final settlement for transactions.

Fractional Reserve Banking

A system where banks hold only a fraction of total deposits as reserves in currency.

Money Creation

The process where banks create new checking deposits based on the reserve ratio and excess reserves.

Money Multiplier

The factor by which an initial amount of excess reserves can multiply to create new checking deposits.

Demand for Money

The sum of money demanded for transactions and as an asset, inversely related to the nominal interest rate.

Money Market Equilibrium

The point where the quantity of money demanded equals the quantity of money supplied in the money market.

Expansionary Monetary Policy

A policy aiming to boost aggregate demand by lowering interest rates through increasing the money supply.

Contractionary Monetary Policy

A policy aiming to combat inflation by increasing interest rates through decreasing the money supply.

Loanable Funds Market

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

Phillips Curve

A graphical representation showing the inverse relationship between inflation and the unemployment rate in the short run.

Wage-Price Spiral

A self-perpetuating spiral where demand rises and supply goes down, leading to inflation.

Inflation due to Changes in the Money Supply

Inflation can occur due to changes in the monetary supply, affecting the price level indirectly.

Theory of Monetary Neutrality

A theory stating that changes in the money supply do not impact the economy fundamentally, only altering dollar values.

Quantity Theory of Money

Asserts that the quantity of money determines the price level and the growth rate of money determines inflation.

Equation of Exchange

States that nominal GDP (P × Q) equals the quantity of money (M) multiplied by the velocity of money (V), represented as MV = PQ.

Crowding Out Effect

The theory that public sector spending can reduce private sector spending, affecting economic growth.

Fiscal Stimulus

Expansionary fiscal policy involving increased government spending, decreased personal taxes, or increased income transfers.

Budget Surplus

When government revenues exceed expenditures, occurring when tax revenues surpass government purchases plus transfers.

National Debt

Accumulation of deficits over multiple years, as seen in the immense US government debt.

GDP per Capita

Growth measured through real GDP per person, indicating economic growth.

Aggregate Production Function

Shows the relationship between production and capital, influencing long-run economic growth.

Productivity

Quantity of output produced per worker in a given time, affecting economic growth.

Balance of Payments Accounts

Summary of payments between the US and foreign countries, including the current, capital, and official reserves accounts.

Exchange Rate

The price of one currency in terms of another, influencing international trade and finance.

Quantity of Currency Demanded

The amount of an international currency that domestic and foreign consumers are willing to purchase at various exchange rates.

Inverse Relationship

The connection where as the exchange rate rises, the quantity of currency demanded decreases, and vice versa.

Foreign Exchange Supply

The quantity of an international currency that domestic and foreign sellers are willing to sell at different exchange rates.

Direct Relationship

The correlation where as exchange rates rise, the quantity of currency supplied increases, and as they fall, the quantity supplied decreases.

FOREX Market Equilibrium

The state in the foreign exchange market when the quantity supplied equals the quantity demanded at a specific exchange rate.

Monetary Policy Impact

The effect of changes in the money supply by the central bank on interest rates, currency value, and exports.

Tariffs

Taxes on imported goods that can be revenue tariffs (on goods not produced domestically) or protective tariffs (on domestic goods to protect from foreign competition).

Inefficiency

Occurs when tariffs or quotas promote less efficient domestic industries over more efficient foreign sectors, leading to a deadweight loss.

Capital Flow

Inbound capital flow is funds injected into a domestic economy by foreign investors, while outbound capital flow is funds extracted by domestic investors.

Real Interest Rates

The interest rates adjusted for inflation that influence international capital flows and impact net exports.