AP Macro Formulas and Definitions

The expenditure approach to measuring GDP correlates well with aggregate demand.

GDP = C + I + G + Xn

The income approach to measuring GDP correlates well with aggregate supply.

GDP = W + I + R + P

Calculating nominal GDP

The quantity of various goods produced in a nation times their current prices, added together.

GDP Deflator

A price index used to adjust nominal GDP to arrive at real GDP.

Real GDP

(Nominal GDP/GDP Deflator) x 100

GDP Growth Rate

[(Current year’s GDP - Last year’s GDP)/Last year’s GDP] x 100

Inflation rate via CPI

[(This year’s CPI - Last year’s CPI)/Last year’s CPI] x 100

Real Interest Rate

nominal interest rate - inflation rate

Unemployment Rate

(number of unemployed/number in the labor force) x 100

money multiplier

1/RRR

Quantity Theory of Money

MV = PQ = Y

MPC + MPS = 1

The fraction of an increase in disposable income that is spent plus the fraction that is saved must equal 1.

Spending Multiplier

1/(1-MPC) OR 1/MPS

Tax Multiplier

-MPC/MPS

Absolute Advantage

a country or entity can produce the good using fewer resources than another country or entity

Aggregate Demand

curve that shows the total quantity demanded for all goods and services of a nation at various price levels in a given period of time

Aggregate Supply

total amount of goods and services that all the firms in all the industries in a country will produce at various price levels in a given period of time

Appreciation

increase in the value of one currency relative to another, resulting from an increase in demand for or a decrease in supply of the currency on the foreign exchange market

Balance of Payments

measures all the monetary exchanges between one nation and all other nations (includes current and capital account)

Bonds

certificate of debt issued by a company or a government to an investor

Budget Deficit

when a government spends more than it collects in tax revenues in a given year

Business Cycle

model showing short-run periods of contraction and expansion in output experienced by an economy over a period of time

Capital

human-made resources used to produce goods and services (human capital and physical capital)

Capital Account (Financial Account)

measures flow of funds for investment in real assets or financial assets between a nation and the rest of the world

Ceteris Paribus

“other things being equal”

Circular Flow Diagram

model of the macroeconomy that shows the interconnectedness of businesses, households, governments, banks, and the foreign sectors (money flows in a circular direction and goods, services, and resources flow in the opposite direction)

Classical Economic Theory

view that an economy will self correct from periods of economic shock if left alone

Comparative Advantage

when an individual, frim, or nation is able to produce a particular product at a lower opportunity cost than another

Consumer Price Index

index that measures the price of a fixed market basket of consumer goods bought by a typical consumer

Consumption

component of aggregate demand; measures total spending by domestic households on goods and services

Contractionary Fiscal Policy

demand-side policy whereby government increases taxes or decreases its expenditures in order to reduce aggregate demand (bring down high inflation rates)

Contractionary Monetary Policy

demand-side policy whereby the central bank reduces the supply of money, increasing interest rates and reducing aggregate demand (bring down high inflation rates)

Cost-Push Inflation

inflation from a decrease in AS and accompanied by a decrease in real output and employment (“stagflation”)

Crowding-Out Effect

rise in interest rates and the resulting decrease in investment spending in the economy caused by increased government borrowing in the loanable funds market

Current Account

Measures the balance of trade in goods and services and the flow of income between one nation and all other nations

Cyclical Unemployment

unemployment caused by a fall in AD in a nation

Deflation

decrease in average price level of a nation’s output over time

Demand Deposit

deposit in a commercial bank against which checks may be written (“checkable deposit”)

Demand-Pull Inflation

inflation resulting from an increase in AD without a corresponding increase in AS

Depreciation

decrease in value of one currency relative to another, resulting from a decrease in demand for or an increase in the supply of the currency on the foreign exchange market

Devaluation

when a government intervenes in the market for its own currency to weaken it relative to another currency

Discount Rate

one of the three tools of monetary policy, it is the interest rate that the federal government charges on the loans it makes to commercial banks

Economic Growth

increase in the potential output of goods and services in a nation over time

Economic Resources

land, labor, capital, entrepreneurial ability that are used in the production of goods and services

Excess Reserves

amount by which a bank’s actual reserves exceed its required reserves

Exchange Rate

price of one currency in terms of another currency, determined in the forex market

Exports

spending by foreigners on domestically produced goods and services

Federal Funds Rate (FFR)

interest rate banks charge one another on overnight loans made out of their excess reserves

Fiscal Policy

changes in government spending and tax collections implemented by government with the aim of either increasing or decreasing AD to achieve the macroeconomic objectives of full employment and price-level stability

Floating Exchange Rate System

when a currency’s exchange rate is determined by the free interaction of supply and demand in international forex markets

Forex Market

market in which international buyers and sellers exchange foreign currencies for one another to buy and sell goods, services, and assets from various countries

Fractional Reserve Banking

banking system in which banks hold only a fraction of deposits as required reserves and can lend some of the money deposited by their customers to other borrowers

Frictional Unemployment

unemployment of workers who have employable skills, such as those who are voluntarily moving between jobs or recent graduates who are lookin for their first job