AP Econ Unit 5 Vocab

Cyclically Adjusted Budget Balance

An estimate of what the budget balance would be if real GDP were exactly equal to production output

Fiscal Year

The time period used for much of government accounting, running from October 1st to September 30th. Fiscal years are labeled by the calendar year in which they end.

Public Debt

Government debt held by individuals and institutions outside of the government

Debt-GDP Ratio

Government debts as a percentage of GDP, frequently used as a measure of a government’s ability to pay its debts

Implicit Liabilities

Spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics. In the United States, the largest implicit liabilities arise from Social Security and Medicare, which promise transfer payments to current and future retirees (Social Security) and to the elderly (Medicare).

Target Federal Funds Rate

The Federal Reserve’s desired level for the federal funds rate. The Federal Reserve adjusts the money supply through the purchase and sale of Treasury bills until the actual rate equals the desired rate.

Expansionary Monetary Policy

Monetary policy that, through the lowering of the interest rate, increases aggregate demand and therefore output

Contractionary Monetary Policy

Monetary policy that, through the raising of the interest rate, reduces aggregate demand and therefore output

Taylor Rule for Monetary Policy

A rule for setting the federal funds rate that takes into account both the inflation rate and the output gap

Inflation Targeting

An approach to monetary policy that requires the central bank try to keep the inflation rate near a predetermined target rate

Monetary Neutrality

The concept that changes in the money supply have no real effects on the economy in the long run and only result in a proportional change in the price level

Classical Model of the Price Level

A model of the price level in which the real quantity of money is always at its long-run equilibrium level. This model ignores the distinction between the short-run and the long-run, but is useful for analyzing the case of high inflation.

Inflation Tax

The reduction in the value of money held by the public caused by inflation

Cost-Push Inflation

Inflation that is caused by a significant increase in the price of an input with economy-wide importance

Demand-Pull Inflation

Inflation that is caused by an increase in aggregate demand

Short-Run Phillips Curve

A graphical representation of the negative short-run relationship between the unemployment rate and the inflation rate

Non-Accelerating Inflation Rate of Unemployment (NAIRU)

The unemployment rate at which, other things equal, inflation does not change over time

Long-Run Phillips Curve

A graphical representation of the relationship between unemployment and inflation in the long run after expectations of inflation have had time to adjust to experience

Debt Deflation

The reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation; occurs because borrowers, whose real debt rises as a result of deflation, are likely to cut spending sharply, and lenders, who real assets are now becoming more valuable, are less likely to increase spending

Zero Bound

The lower bound of zero on the nominal interest rate

Liquidity Trap

A situation in which monetary policy is ineffective because nominal interest rates are up against the zero bound

Macroeconomic Policy Activism

The use of monetary policy and fiscal policy to smooth out the business cycle

Monetarism

A theory of business cycles, associated primarily with Milton Friedman, that asserts that GDP will grow steadily if the money supply grows steadily

Discretionary Monetary Policy

The use of changes in the interest rate or the money supply to stabilize the economy

Monetary Policy Rule

A formula that determines the central bank’s actions

Quantity Theory of Money

A theory that emphasizes the positive relationship between the price level and the money supply. It relies on the equation (M x V = P x Y)

Velocity of Money

The ratio of nominal GDP to the money supply

Natural Rate Hypothesis

The hypothesis that the unemployment rate is stable in the long run at a particular natural rate. According to this hypothesis, attempts to lower the unemployment rate below the natural rate of unemployment will cause an ever-rising inflation rate.

Political Business Cycle

A business cycle that results from the use of macroeconomic policy to serve political ends

New Classical Macroeconomics

An approach to the business cycle that returns to the classical view that shifts in the aggregate demand curve affect only the aggregate price level, not aggregate output

Rational Expectations

A theory of expectation formation that holds that individuals and firms make decisions optimally, using all available information

New Keynesian Economics

Theory that argues that market imperfections can lead to price stickiness for the economy as a whole

Real Business Cycle Theory

A theory of business cycles that assets that fluctuations in the growth rate of total factor productivity causes the business cycle

Rule of 70

A mathematical formula that states that the time it takes real GDP per capita, or any other variable that grows gradually over time, to double is approximately 70 divided by that variable’s annual growth rate

Labor Productivity

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 embodied in the workforce

Technology

The technical means for the production of goods and services

Aggregate Production Function

A hypothetical function that shows how productivity (real GDP per worker) depends on the quantities of physical capital and human capital per worker as well as the state of technology

Diminishing Returns to Physical Capital

In an aggregate production function, when the amount of human capital per worker and the state of technology are held fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity

Growth Accounting

Estimates the contribution of each of the major factors (physical and human capital, labor, and technology) in the aggregate production function

Total Factor Productivity

The amount of output that can be produced with a given amount of factor inputs

Convergence Hypothesis

A theory of economic growth that holds that international differences in real GDP per capita tend to narrow over time because countries with low GDP per capita generally have higher growth rates

Research and Development (R&D)

Spending to create and implement new technologies

Infrastructure

Physical capital, such as roads, power lines, ports, information networks, and other parts of an economy, that provides the underpinnings, or foundation, for economy activity

Sustainable

Describes continued long-run economic growth in the face of limited supply of natural resources and the impact of growth on the environment

Depreciation

A fall in the value of one currency in terms of other currencies