AP Macro Unit 5 Terms

Fiscal Policy

Fiscal Policy

Government policy regarding taxation and spending to influence the economy.

Monetary Policy

Central bank actions that manage the money supply and interest rates.

Phillips Curve

A graphical representation of the relationship between inflation and unemployment.

Short-Run Phillips Curve (SRPC)

Illustrates the inverse relationship between inflation and unemployment in the short run.

Long-Run Phillips Curve (LRPC)

A vertical line at the natural rate of unemployment indicating no trade-off between inflation and unemployment in the long run.

Aggregate Demand

The total demand for goods and services within an economy at a given overall price level and in a given time period.

Expansionary Policy

A policy designed to stimulate economic growth, often through increased government spending or tax cuts.

Contractionary Policy

A policy aimed at reducing inflation through decreases in government spending or increases in taxes.

Natural Rate of Unemployment

The level of unemployment that exists when the economy is at full capacity.

Economic Growth

An increase in the production of goods and services in an economy over time.

Government Budget Surplus

a situation that occurs when income exceeds expenditures. → there is more money for their spending

Government Budget Deficit

the amount of money the federal government spends minus the amount of revenue it takes in. → there is less money and more spending

Balanced Budget

occurs when revenues are equal to or greater than total expenses. 

Government Budget Balance

 the difference between tax revenue and government spending

National Debt

The total amount of money that a country's government has borrowed and not yet repaid.

Crowding Out

A situation where government borrowing decreases private sector investment.

Quantity Theory of Money

The theory that changes in the money supply directly impact price levels.

Aggregate Production Function

A mathematical representation of the relationship between the quantity of inputs used in production and the quantity of output produced.

Supply-Side Policies

Policies designed to increase aggregate supply through incentives for production.

Equation of Exchange

• M*V = P*T (nominal GDP) - this equation is always true

  • M: money/supply of money

  • V: velocity of money (the number of times each unit of money changes hands in a year/how fast is money moving) 

  • P: price level

  • T: transactions (real GDP)

Velocity of Money

The rate at which money circulates in the economy, or the number of times a unit of currency is spent to buy goods and services within a given time period.

Inflationary Gap

The situation where actual output exceeds potential output, leading to upward pressure on prices.

Recessionary Gap

The situation where actual output is less than potential output, indicating higher unemployment.

Monetarism

 the theory or practice of controlling the supply of money as the chief method of stabilizing the economy

Taylor Rule

a formula tying a central bank’s policy rate to inflation and economic growth. It assumes an equilibrium federal funds rate 2% above the annual inflation rate.

Neutrality of Money Policy

changes in money supply have no effect on real variables in the long run (real output & employment)

Economic Growth

a sustained increase in real GDP per capita over time 

Output per Capita/Real GDP per Capita

output divided by population

Productivity/Labor Productivity (Economic Def.)

the amount of output produced per unit of labor 

Human Capital

improvements in education, knowledge, and wealth that make each unit of labor more productive

Investment Spending

refers to the expenditure made by businesses, governments, or individuals to acquire or upgrade physical assets/putting in money for production to occur

Capital Stock

all common stock and preferred stock a corporation is legally allowed to issue