ap macroeconomics vocab (crash course)

Absolute Advantage

A country or individual has an absolute advantage in the production of a good when the country can produce the good using fewerresources than another country or individual.

Aggregate Demand (AD)

A schedule or curve that shows the total quantity demand for all goods and services of a nation at various price levels at a given period of time.

Aggregate Supply (AS)

The 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

An 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 the current account and the capital account.

Bonds

A 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

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

Capital

Human-made resources (machinery and equipment) used to produce goods and services; goods that do not directly satisfy human wants.

Capital Account (Financial Account)

Measures the flow of funds for investment in real assets (such as factories or office buildings) or financial assets (such as stocks and bonds) between a nation and the rest of the world.

Ceteris Paribus

"Other things being equal;" used as a reminder that all variable other than the ones being studied are assumed to be constant.

Circular Flow Diagram

A model of the macroeconomy that shows the interconnectedness of business, households, government, banks, and the foreign sectors. Money flows in a circular direction, and goods, services, and resources flow in the opposite direction.

Classical Economic Theory (Laissez-faire)

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

Comparative Advantage

When an individual, a firm or a nation is able to produce a particular product at a lower-opportunity cost than another individual, firm, or nation.

Consumer Price Index (CPI)

An index that measures the price of a fixed market basket of consumer goods bought by a typical consumer. It calculates the inflation rate in a nation.

Consumption

A component of a nation's aggregate demand; measures the total spending by domestic households on goods and services.

Contractionary Fiscal Policy

A demand-side policy whereby government increases taxes or decreases its expenditures in order to reduce aggregate demand. Could be used in a period of high inflation to bring down the inflation rate.

Contractionary Monetary Policy

A demand-side policy whereby the central bank reduces the supply of money, increasing interest rates and reducing aggregate demand. Could be used to bring down high inflation rates.

Cost-Push Inflation

Inflation resulting from a decrease in AS (from higher wage rates and raw material prices, such as the price of oil) and accompanied by a decrease in real output and employment. AKA "stagflation" or "adverse aggregate supply shock".

Crowding-Out Effect

The rise in interest rates and the resulting decrease in investment spending in the economy caused by increased government borrowing in the loanable funds market. Seen as a disadvantageous side effect of expansionary fiscal policy.

Current Account

Measures the balance of trade in goods and services and the flow of income between one nation and all other nations. It also records monetary gifts or grants that flow into or out of a country. Equal to a country's net exports, or its exports minus its imports.

Cyclical Unemployment

Unemployment caused by a fall in aggregate demand in a nation. Not included in the natural rate of unemployment. When a nation is in a recession, there will be cyclical unemployment.

Deflation

A decrease in the average price level of a nation's output over time.

Demand Deposit

A deposit in a commercial bank against which checks may be written. AKA "checkable deposit".

Demand-Pull Inflation

Inflation resulting from an increase in AD without a corresponding increase in AS.

Depreciation

A decrease in the 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 intervens 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

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

Economic Resources

Land, labor, capital, and entrepreneurial ability that are used in the production of goods and services. They are scarce.

Excess Reserves

The amount by which a bank's actual reserves exceed its required reserves. Banks can lend excess reserves; when they do, they expand the money supply. The amount of excess reserves in the banking system determine equilibrium interest rate.

Exchange Rate

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

Exports

The spending by foreigners on domestically produced goods and services. Counts as an injection into a nation's circular flow of income.

Federal Funds Rate (FFR)

The interest rate banks charge one another on overnight loans made out of their excess reserves. the FFR is the interest rate targeted by the Fed through its open-market operations.

Fiscal Policy

Changes in government spending and tax collections implemented by government with the aim of either increasing or decreasing aggregate demand 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 (Foreign Exchange Market)

The 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

A 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 looking for their first job.

Full Employment

When an economy is producing at a level of coutput at which almost all the nation's resources are employed. The unemployment rate when an economy is at full employment equals the natural rate, and includes only frictional and structural unemployment. Full-employment output is also referred to as "potential output".

GDP

The total market value of all final goods and services produced during a given time period within a country's borders. Equal to the total income of the nation's households or the total expenditures on the nation's output.

GDP Deflator

The price index for all final goods and services used to adjust the nominal GDP into real GDP.

Human Capital

the value skills integrated into labor through education, training, knowledge, and health. An important determinant of aggregate supply and the level of economic growth in a nation.

Imports

Spending on goods and services produced in foreign nations.Counts as a leakage from a nation's circular flow of income.

Inflation

A rise in the average level of prices in the economy over time (percentage change in the CPI).

Inflationary Gap

The differnece between a nation's equilibrium level of output and its full employment level of output when the nation is overheating (producing beyond its full employment level).

Inflationary Spiral

The rapid increase in average price level resulting from demand-pull inflation leading to higher wages, causing cost push inflation.

Interest Rate

The opportunity cost of money. Either the cost of borrowing money or cost of spending money.

Investment

A component of aggregate demand, it includes all spending on capital equipment, inventories, and technology by firms. Not including financial investment (purchase of stocks and bonds).

law of increasing opportunity cost

as more of a particular product is produced, the opportunity cost, in terms of what must be given up of the other goods to produce each unit of the product, increases; explains the convex shape of a nation's production possibilities curve

loanable funds market

market in which the demand for private investment and supply of household savings intersect to determine the equilibrium real interest rate

long run

period of time over which the wage rate and price level of inputs in a nation are flexible; in the long run, any changes in AD are cancelled out due to the flexibility of wages and prices and an economy will return to its full employment level of output

long run aggregate supply (LRAS)

level of output to which an economy will always return in the long run. Intersects the horizontal axis at the full employment or potential level of output

M1

component of the money supply including currency and checkable deposits

M2

a more broadly defined component of the money supply;equal to M1 plus savings deposits, money market deposits, mutual funds, and small time deposits

M3

broadest component of the money supply, equal to M2 plus large time deposits

macroeconomics

study of the entire nations' economies and the interactions between households, firms, government, and foreigners

macroeconomic equilibrium

level of output at which a nation is producing at any particular period of time. may be below its full employment level

managed or fixed exchange rate system

when a government or central bank takes action to manage or fix the value of its currency relative to another currency on the foreign market

marginal analysis

decision-making which involves a comparison of marginal benefits and marginal costs

marginal propensity to consume

fraction of any change in income spent on domestically produced goods and services; equal to the change in consumption divided by the change in disposable income

marginal propensity to save

the fraction of any change in income that is saved; equal to the change in savings divided by the change in disposable income

market economic system

a system of resource allocation in which buyers and sellers meet in markets to determine the price and quantity of goods, services, and productive resources

microecnomics

the study of the interaction between consumers and producers in markets for individual products

monetarism

macroeconomic view that the main cause of changes in aggregate output and price level are fluctuations in the money supply

monetary policy

central bank's manipulation of the supply of money aimed at raising or lowering interest rates to stimulate or contrasct the level of aggregate demand to promote the macroeconomic objectives of price level stability and full employment

money

any object that can be used to facilitate the exchange of goods and services in a market

money demand

the sum of the transaction demand and the asset demand for money. inversely related to the nominal interest rate

money market

the market where the supply of money is set by the central bank; includes the downward sloping money demand curve and vertical money supply curve. the price of money is hte nominal interest rate

money supply

the verticle curve representing the total supply of excess reserves in a nation's banking system. determined by the monetary policy actions of the central bank

multiplier effect

the increase in total spending in an economy resulting from an initial injection of new spending. the size depends on the spending multiplier

natural rate of unemployment

the level of unemployment that prevails in an economy that is producing at its full employment level of output. includes structural and frictional unemployment. close to 5 percent

net exports

a component of aggregate demand that equals the income earned from the sale of exports to the rest of the world minus expenditures by domestic consumers on imports

official reserves

to balance the two accounts in the balance of payments (current and financial accounts), a country's official foreign exchange reserves measures the net effect of all the money flows from the other accounts

open-market operations

the central bank's buying and selling of government bonds on the open market from commercial banks and the public; aimed at increasing or decreasing the level of reserves in the banking system and thereby affects the interest rate and the level of aggregate demand

opportunity cost

what must be given up to have anything else; not necessarily monetary costs, but rather include what you could do with the resources you use to undertake any activity or exchange

phillips curve (long run)

a curve vertical at the natural rate of unemployment showing that in the long run there is no trade-off between the prices level and the level of unemployment in an economy

phillips curve (short run)

a downward-sloping curve showing the short-run inverse relationship between the level of inflation and the level of unemployment

production possibilities curve (ppc)

a graph that shows the various combinations of output that the economy can produce given the available factors of production and the available production technology

productivity

the output per unit of input of a resource; an important determinant of the level of aggregate supply in a nation

protectionism

the use of tariffs, quotas, or subsidies to give domestic producers a competitive advantage over foreign producers; meant to protect domestic production and employment from foreign competition

rational expectations theory

the hypothesis that business firms and households expect monetary and fiscal policies to have certain effects on the economy and take, in pursuit of their own self-interests, actions which make these policies ineffective at changing real output

recession

a contraction in total output of goods and services in a nation between two periods of time; could be caused be a decrease in AS or AD

recessionary gap

the difference between an economy's equilibrium level of output and its full employment level of output when an economy is in recession

required reserves

the proportion of a bank's total deposits it is required to keep in reserve with the central bank; determined by the required reserve ratio

scarcity

something is scarce when it is both desired and limited in supply; basic economic problem

self-correction

the idea that an economy producing at an equilibrium level of output that is below or above its full employment will return on its own to its full employment level if left to its own devices; requires flexible wages and prices and is associated with classical economic views

stagflation

a macroeconomic situation in which both inflation and unemployment increase; caused by a negative supply shock

sticky wage and price model

another name for the short-run aggregate supply curve because workers' wage demands take time to adjust to changes in the overall price level, and therefore, in the short run an economy may produce well below or beyond its full employment level of output

structural unemployment

unemployment caused by changes in the structure of demand for goods and in technology; workers who are unemployed because they do not match what is in demand by producers in the economy or whose skills have been left behind by economic advancement

supply shock

anything that leads to a sudden, unexpected change in AS; can be negative (decreases AS) or positive (increases AS); may include a change in energy prices, wages, or business taxes, or may result from a natural disaster or a new discovery of important resources

trade deficit

when a country's total spending on imported goods and services exceeds its total revenues from the sale of exports to the rest of the world; synonymous with a deficit in the current account of the balance of payments and with a negative net export component of GDP

trade surplus

when a country's sale of exports exceeds its spending on imports; synonymous with a surplus in the current account of the balance of payments

wealth

an important determinant of consumption; the total value of a household's assets minus all its liabilities