AP Macroeconomics

scarcity

• the inability of limited resources to satisfy unlimited wants\

• if there is less than is wanted, item is considered scarce

• scarcity occurs because the factors of production are scarce

factors of production

• land (natural resources)

• labor (human effort)

• capital (equipment used to produce goods + services)

• entrepreneurship (ability + willingness to take risks + start a business)

market economy

• economic system where production + distribution of goods are primarily determined by supply + demand

• Individuals and businesses own resources and have the freedom to make production + consumption decisions

• the government doesn’t really intervene

• ex: The United States, the United Kingdom, Japan

command economy

• economic system where the government or central authority makes all decisions about production and distribution of goods and services

• often involves state ownership of resources and planned economic activity

• ex: North Korea, Cuba

opportunity cost

• value of the next best alternative not chosen

• what you give up when you make a choice

absolute advantage

ability to produce more using fewer resources

comparative advantage

ability to produce at a lower opportunity cost

law of demand

consumers buy more at low prices and less at high prices

demand shifters

TRIBE

• Tastes and preferences

• Related goods (the price of them)

• Income

• Buyers (more consumers = more demand)

• Expectations

law of supply

producers will sell more at high prices and less at low prices

supply shifters

ROTTEN

• Resources (Changes in input cost like raw materials, labor, etc.)

• Other goods’ prices (changes in profitability of producing alternative goods)

• Technology (advancements that can increase efficiency)

• Taxes + subsides (government policies)

• Expectations of Producers

• Number of sellers (quantity of firms in the market)

Gross Domestic Product (GDP)

• the total value of all final goods + services produced within a country in a calendar year

• doesn’t include used goods, intermediate goods, financial transactions

GDP Per Capita

• indicates the average economic production per individual

• higher GDP per capita suggests better quality of life for an individual

• doesn’t account for non-market activities (volunteering, chores, etc.)

• ignores income inequality because it’s just an average

• also doesn’t track illegal activities

unemployed

not working + not actively looking for work

frictional unemployment

• in between jobs

• coming out college + looking for first job

structural unemployment

• changes in the economy make some jobs + roles obsolete

• ex: new technology does the job someone had to do manually

cyclical unemployment

• caused by an overall economic downturn

• when we have this, it means we’re in a recession

natural rate of unemployment

• frictional + structural

• NO cyclical unemploymenet

inflation

a general increases in prices in the economy

Consumer Price Index (CPI)

• measure of tracking inflation

• tracks price changes in a market “basket of products”

  • pre-selected collection of goods commonly purchased by households

GDP deflator

Tracks price changes in all products

nominal GDP

• GDP that has not been adjusted for inflation

• Uses current year prices

real GDP

• value of current year’s goods

• uses BASE year’s prices

unexpected inflation helps…

• borrowers

  • they have to pay back fewer real dollars

  • when inflation occurs, dollar is worth less

unexpected inflation hurts…

• banks

  • paid back fewer real dollars

• savers

  • savings is worth fewer real dollarss

Marginal Propensity to Consume (MPC)

percentage of new income spent

Marginal Propensity to Save (MPS)

percentage of new income saved

spending multiplier

how a small change in spending has a magnified impact on the overall GDP of an economy

tax mulitplier

shows how much of a change in taxes will affect GDP

aggregate demand

the demand for all goods + services in the economy

aggregate demand shifters

• any change in the formula for GDP

• C + I + G + X_n

short-run Aggregate supply

• shows a direct relationship between real GDP and price level

• Upwards sloping because wages are “sticky”

  • They don’t immediately acknowledge changes in overal price level

SRAS Shifters

PRITE

• Productivity

• Resource prices

• Inflation expectations

• Taxes + subsidies

• Exchange rates (if imports are involved)

Long-run Aggregate supply

• shows the economy’s potential output

• displays the level of real GDP that an economy can produce when all resources are fully employed

LRAS (and PPC) shifters

QQPT

• Quantity of resources

• Quality of resources

• Productivity

• Technology

Short-run Equilibrium

Found at the intersection of the Aggregate Demand curve and the Short-Run Aggregate Supply curve

Long-run Equilibrium

• Current output = Long-run output

• Unemployment equals the natural rate

Expansionary fiscal policy

• done when there is a recessionary gap

• a way of fighting unemployment

• increase of gov’t spending and/or tax decrease

• increase of budget deficit

• will shift AD curve to the right

Contractionary Fiscal Policy

• done when there is an inflationary gap

• a way of fighting inflation

• decrease gov’t spending and/or tax increase

• decrease of budget deficit

• will shift AD curve to the left

automatic stabilizers

• built-in features of the economy that help smooth out GDP fluctuations without governmental action

• automatically cause budget deficit to decease during expansions + increase during contractions

• ex: taxes because they automatically adjust since they’re based on income

money

• medium of exchange

• unit of account

• store of value

M_o (Monetary Base)

• money most directly created + controlled by central bank

• Bank Reserves (the funds) + currency (physical money)

M₁ (Money)

Currency, Checkable Deposits, and Savings Deposits

M₂ (Money + Near Money)

M1 + Small Time Deposits + Money Market

Bank Balance Sheets: Liabilities

• things that the bank owes

• ex: savings deposits, demand deposits

• only demand deposit have a reserve requirement

Bank Balance Sheet: Assets

• Total Reserves (Required [cannot loan out, Excess [can])

  • all the money the bank has

• Loans

• Other assets (liabilities)

Money multiplier

How many dollars worth of new loans, deposits and money can be created from excess reserves

Asset demand for money

The desire to hold wealth as money instead of other assets

Transaction demand for money

the amount of money people hold for everyday purchases + spending

discount rate

interest rate the central bank charges banks

reserve requirement

the percentage of checkable deposits the bank CANNOT loan out

scarce reserves

reserves are limited in the banking system

ample reserves

banks hold large quantities of reserves

investment demand shifts

anything that impacts the profit potential of new investments

savings supply

money saved is available for loans

savings supply shifts

• disposable income

• economic outlook

• foreign investment

national debt

accumulation of all previous deficits and surpluses

crowding out

increase in government deficit will increase interest rates

economic growth is an increase in ___ GDP or per capita GDP

POTENTIAL

Philips Curve Short-Run

• Shows relationship between inflation vs. unemployment rate

• Usually inverse slope

Balance of Payments

• An accounting of transactions between countries

• Two components: current account and the capital and financial accoun

Current Account

Includes transactions of Goods, Services and Investment Income

Capital & Financial Account

Keep track of purchases of assets: stocks, currency and bonds

Money in

Credit or inflow

Money out

Debit or Outflow

Trade Surplus

Exports>Imports

Trade Deficit

Imports>Exports

Exchange rate

• The price of one currency in terms of another

• If exchange rate increases = appreciate

• If exchange rate decreases = decreases