AP Econ Unit 5

Cyclically Adjusted Budget Balance

Cyclically Adjusted Budget Balance

Aka full employment budget balance, it is the budget balance obtained when GDP is at full potential

Fiscal Year

The annual accounting period for businesses and organizations

Public Debt

Aka government debts, these are the obligations of governments to pay certain sums to holders of securities at some future time

Debt-GDP Ratio

The ratio between a country’s government debt and its GDP output

Implicit Liabilities

Liabilities that while not legally binding, are borne by governments due to political or moral obligations

Target Federal Funds Rate

The federal funds rate is the interest charged by banks to borrow from each other overnight, the target rate is the one set by the central bank

Expansionary Monetary Policy

Monetary policy that seeks to expand the economy and grow it, enacted via OMO, setting lower RRR, and lowering interest rates

Contractionary Monetary Policy

Monetary policy that seeks to reduce the economy during inflationary gaps via selling of government bonds, raising the interest rates, and raising the RRR

Taylor Rule for Monetary Policy

Monetary policy targeting rule for central banks to use to stabilize economic activity by deliberate setting of the short-term interest rates

Inflation Targeting

Monetary policy where the central bank follows an explicit target for the inflation rate for the mid-term

Monetary Neutrality

Economic theory stating that MS changes only affect the nominal aspect of the economy and not the real part

Classical Model of the Price Level

Theory that the economy is self-regulating and operates effectively without government intervention

Inflation Tax

The implicit tax on nominal assets such as cash, bonds, or savings accounts

Cost-Push Inflation

Cost-Push inflation occurs when overall prices increase due to increase in the cost of wages and raw materials

Demand-Pull Inflation

Demand for goods and services exceeds supply resulting in inflated prices due to shortage of goods/services

Short-Run Phillips Curve

A downward sloping curve that suggests an inverse relationship between inflation and unemployment from Bill Phillips

Nonaccelerating Inflation Rate of Unemployment (NAIRU)

The lowest level of unemployment that can occur in the economy before inflation grows

Long-Run Phillips Curve

States that in the long-run there is no relationship between inflation and unemployment

Debt Deflation

Economic theory that suggests recessions and depressions occur due to rising debt levels in real value caused by deflation

Zero Bound

Expansionary monetary policy tool where central banks lower short-term interest rates to zero, to stimulate the economy

Liquidity Trap

When consumers and investors choose to hoard cash and not spend, making monetary policy ineffective

Macroeconomic Policy Activism

Utilization of monetary and fiscal policy to smooth out the business cycle

Monetarism

Theory that governments foster economic stability by targeting the growth rate of the money supply

Discretionary Monetary Policy

The central bank’s actions to minimize inflation, maximize employment, ensure growth, and promote economic interests abroad

Monetary Policy Rule

How a central bank will adjust its instruments of policy

Quantity Theory of Money

The general price level of goods and services is proportional to the money supply in an economy

Velocity of Money

The rate in which money is exchanged in an economy

Natural Rate Hypothesis

An economic theory that states the unemployment rate in an economy will eventually return to its natural rate

Political Business Cycle

Fluctuations in economic activity due to the influence of political events

Ex: elections

New Classical Macroeconomics

Broad theory that focuses on supply and demand as the driving forces behind the production, pricing, and consumption of goods and services

Rational Economics

Economic theory that suggests individuals base their decisions on the best available information in the market, and that they use past trends to make predictions about the future of the economy

New Keynesian Economics

Emphasis on the role of price and wage rigidities in explaining macroeconomic disequilibrium and the impact of monetary policy

Real Business Cycle Theory

Economic concept that views business cycle fluctuations as the result of real shocks to the economy

Rule of 70

The doubling time for an investment or quantity at a consistent annual growth rate

Labor Productivity

Real economic output per labor hour

Physical Capital

Factor of production

Ex: tangible goods that assist in the production of goods/services

Human Capital

Factor of production

Ex: the labor and manpower needed to produce stuff

Technology

Could be manufacturing tools or machinery or other devices that assist in the development of goods/services

Aggregate Production Function

Function that shows the technical relationship between aggregate inputs and aggregate outputs, illustrates the change in productivity

Diminishing Returns to Physical Capital

For each new input of capital, there is less and less output produced

Growth Accounting

Procedure used in economics to measure contribution of different factors to economic growth and to compute the rate of technological progress

Total Factor Productivity

Measure of productive efficiency that accounts for differences in cross-country per-capita income; calculated by dividing total production (output) by average costs (inputs)

Convergence Hypothesis

Theory that postulates that as nations become fully industrialized, they begin to resemble other societies and in norms and technology

Research and Development (R&D)

The activities that companies undertake to innovate to develop or improve products and services

Infrastructure

The systems and structures that serve as the foundation for economic development

Sustainable

Economics that consider the environmental impact of economic activity

Depreciation

The amount of value an asset loses from influential factors affecting its market value