AP Macroeconomics ALL Terms

Flashcards of key vocabulary terms and definitions from Economics Lecture Notes

Production Possibilities Curve

A graph showing the different combinations of goods and services that can be produced with a given amount of resources.

Aggregate Demand/Supply

A model that shows the relationship between the aggregate price level and the quantity of aggregate output demanded and supplied.

Phillips Curve

A graph showing the relationship between inflation and unemployment.

Money Market

The market in which the demand for and supply of money determine the nominal interest rate.

Loanable Funds

The market in which the demand for and supply of loanable funds determine the real interest rate.

Foreign Exchange

The market in which currencies are traded.

Real Flow

The flow of goods/services and resources between households and businesses.

Money Flow

The flow of sales, wages, rent, interest, and profits between households and businesses.

Leakages

Occur when money exits the circular flow (imports, savings, taxes).

Injections

Occur when money enters the circular flow (exports, loans, government spending).

GDP

Gross Domestic Product; The total value of all final goods and services produced within a country in a calendar year.

Value Added Approach

Adds contributions a country’s firms make to final goods.

Income Approach

Rent, wages, interest, and profit added together.

Output Expenditure Model

C+Ig+G+Xn

Gross Investment

Business purchases of physical capital and changes in inventories.

Net Investment

Ig - depreciation

Net Exports

Exports - imports

Disposable Income

Personal income - taxes

GDP per capita

GDP/population

Underground Economy

Economic activity that is not officially recorded and, therefore, not included in GDP.

Unemployment Rate

(number of people unemployed/number of people in labor force) x 100

Labor Force

16+ yo, not institutionalized, not in military, actively working/looking for work

Labor force participation rate

(number of people in labor force/working age population) x 100

Discouraged workers

People who left the labor force when they couldn’t get a job.

Frictional unemployment

Workers are temporarily unemployed/between jobs. Individuals are qualified workers with transferable skills but they are not working.

Structural unemployment

Changes in the structure of the labor force make some skills obsolete. Workers do not have transferable skills and these jobs will never come back.

Cyclical unemployment

A result of an economic downturn or recession. As demand for goods and services falls, the demand for labor falls and workers are laid off.

Natural rate of unemployment (NRU)

The amount of unemployment that exists when the economy is healthy ie. there is only frictional and structural unemployment.

Inflation rate

The percent change in prices over a specific time period.

Price indices

Index numbers assigned to each year that show how prices have changed relative to a specific base year.

Consumer Price Index (CPI)

The most commonly used measurement of inflation.

Nominal GDP

GDP in today’s dollars NOT adjusted for inflation.

Real GDP

GDP adjusted for inflation based off of a base year.

GDP deflator

(nominal GDP/real GDP) x 100

Recession

Officially two consecutive quarters (6 months) of falling GDP

Aggregate Demand

Demand for all goods and services in the economy.

Real wealth effect

When price level falls, consumers get more purchasing power, and vice versa. Accounts for behavior of consumers.

Interest rate effect

When price level goes up, people buy less and save less. Less money goes to banks so less is lent out. Less investment spending. Accounts for behavior of borrowers.

Exchange rate effect

When prices increase in one country, other countries don’t want to buy those higher prices goods, so they buy from other countries and QD falls. Accounts for behavior of people in other countries.

Spending Multiplier

An initial change in spending causes a ripple effect to the entire economy, and leads to more total spending.

Marginal propensity to consume

How much people spend as income changes.

Marginal propensity to save

How much people save as income changes.

Simple spending multiplier

1/MPS

Tax Multiplier

MPC/MPS

Money Multiplier

1/reserve requirement

Reserve Requirement

The portion of money that banks are required to hold by law.

Aggregate Supply

The total supply of all goods and services in the economy.

Short-Run Aggregate Supply

As price level goes up, producers have an incentive to produce more so they will make more profit, and vice versa

Capital Stock

The accumulation of physical capital used to produce goods and services

Negative Supply Shock

An unexpected decrease in the availability of a key resource which decreases SRAS

Positive Supply Shock

An unexpected increase in the availability of a key resource which increases SRAS

Long-Run Aggregate Supply

Shows the relationship between price level and real GDP that would be supplied if all prices adjusted due to shifts on the SRAS curve. Represents full employment - shows maximum sustainable capacity

Inflationary Gap

Current output > LR output

Recessionary Gap

Current output < LR output

Demand Pull Inflation

AD shifts right and price level increases.

Cost-push inflation/Stagflation

Dramatic increase in the price of resources resulting in stagnant economy with unemployment > natural rate of unemployment along with higher prices

Fiscal Policy

Government tools that can be used to fight inflation or unemployment using changes in taxes or government spending

Expansionary Fiscal Policy

Fighting unemployment (caused by recessionary gap) by increasing government spending and/or decreasing taxes

Contractionary Fiscal Policy

Fighting inflation (caused by inflationary gap) by decreasing government spending and/or increasing taxes

Balanced Budget Multiplier

Used by USFG to shift the economy without impacting the budget. Increasing taxes and spending by the same amount increases AD

Automatic stabilizers

Help to limit the fluctuations of the business cycle.

Financial sector

Includes lenders, borrowers, and money.

Stocks (equities)

Fiat money that represents ownership of a corporation and the stockholder is often entitled to a portion of the profit paid out as dividends.

Bonds (securities)

Loans/IOUs that represent debt that the government, business, or individual must repay to the lender

Real interest rate

nominal rate - expected inflation

Money

Anything that is generally accepted for goods and services. Serves as a medium of exchange, a unit of account, and a store of value.

Commodity Money

Something that performs the function of money and has intrinsic value ie. gold, silver, cigarettes

Fiat Money

Something that serves as money but has no other value or uses, ie. paper money, coins

Checkable Deposit

Accounts where the owner can use or withdraw funds on demand, with no advanced notice, and are counted in money supply

M1 money

Highest liquidity; Currency in circulation, checkable bank deposits, and traveler’s checks

M2 money

M1 as well as: Savings deposits, time deposits, and money market funds

Bank Runs

When the bank can’t pay you back.

Required Reserves

The minimum amount of deposits that banks must hold by law.

Excess Reserves

Bank reserves over and above the required reserves. This is the amount they can loan out.

Money Multiplier

initial deposit can lead to a larger increase in the money supply due to the banking system's lending practices

Fractional Reserve Banking

Banks hold a portion of deposits and they loan the rest out - when they loan it out, they create more money

Liquidity

The ease in which an asset can be converted into cash without much loss of value

Discount Rate

The interest rate the Fed charges banks. Decreasing increases money supply, increasing decreases money supply

Open Market Operations

The Fed buys or sells bonds to private commercial banks. Buying bonds increases money supply, selling bonds decreases money supply

Transaction Demand

You need money in your pocket so you can buy stuff

Asset demand

People prefer having a liquid asset over stocks, bonds, real estate, etc.

Monetary Policy

The process of controlling the money supply to affect interest rates

Quantitative Easing:

The Fed buys other assets besides money

Interest on Reserves (IOR)

The interest rate that the federal reserve pays commercial banks to hold reserves

Federal Funds Rate

The rate that banks charge each other for overnight loans

Loanable Funds

The amount of money that’s able to be loaned out by financial institutions

Crowding Out

Deficit spending by the government hurts the economy by decreasing the supply of loanable funds and increasing the real interest rate on the funds

Phillips Curve

Shows the relationship between inflation and unemployment

Long-Run Phillips Curve

Vertical - no correlation between inflation and unemployment

Quantity Theory of Money:

M x V = P x Y

Fisher Effect

An increase in expected inflation causes nominal interest rates to increase

Natural Rate of Interest

The interest rate that exists when prices are stable

National Debt

The accumulation of all previous deficits and surpluses

Budget Deficit

Taxes < Spending

Budget Surplus

Taxes > Spending

Budget: Balanced

Taxes = Spending

Investment Tax Credits

Businesses get tax breaks when they buy more physical capital

Balance of Payments Accounts

Tracks the difference between a country’s total exports and total imports

Current Account

Tracks the difference between a country’s total exports and total imports. Includes goods, services, and transfers

Financial (Capital) Account

Tracks the ownership of assets held by foreigners and ownership of foreign assets