Monster Vocabulary AP Macroeconomics [Eventually All Units] (ABNER)

Short-run Aggregate Supply (SRAS)

Total goods/services firms produce in the short run (prices/wages are "sticky" and don’t adjust quickly)

Long-run Aggregate Supply (LRAS)

Economy's maximum sustainable output when all resources (labor, capital) are fully employed (vertical line at "potential GDP")

AD = C + I + G +(X-M)

AD = Consumer spending + Business investment + Government spending + (Exports – imports)

Demand-Pull Inflation

Prices rise b/c AD exceeds SRAS (too much spending chasing too few goods)

Cost-Push Inflation

Prices rise b/c higher production costs (e.g., oil prices) shifting SRAS left

National Income

Total earnings from all resources (wages, rent, interest, profit) in an economy

Scenario A

A situation where the economy is in a recession; there is an output "recessionary" gap [below full-employment]

Scenario B

A situation where the SRAS, LRAS, and AD intersect; there is full-employment

Scenario C

A situation where there is too much AD and the economy is overheating; there is an inflationary gap [above full-employment]

Full-Employment Equilibrium

Economy produces at LRAS (no cyclical unemployment)

Output Gap

Where actual GDP is less than potential GDP

Inflationary Gap

Actual GDP > Potential GDP (overheating economy)

Recessionary Gap

Actual GDP < Potential GDP

Long-Run Equilibrium

Where the economy will recover from 'scenario A' via a decrease in wage expectations, which would increase SRAS and lead to more GDP and a decrease in PL

U > NRU

Unemployment exceeds the natural rate (cyclical unemployment exists)

U = NRU

Economy at full employment (only frictional/structural unemployment)

U < NRU

Unemployment below natural rate (risk of inflation) [overheating]

Tax Multiplier

-MPC/(1−MPC) → effect of tax changes on GDP

Spending Multiplier

1/(1−MPC) → effect of spending on GDP

Balanced Budget Multiplier

The effect on GDP when government spending and taxes change by the same amount

Ex: Government spending and taxes both increase by $10, it boosts GDP by $10

Multiplier Effect

Initial spending trades hands with many people, subtracting how much is saved every time, leads to larger total GDP change

Marginal Propensity to Save (MPS)

(MPS) Fraction saved (MPS = 1 - MPC) [e.g., MPS = 0.2 → save 20¢ of each $1]

Marginal Propensity to Consume (MPC)

(MPC) Fraction of extra income spent [e.g., MPC = 0.8 → spend 80¢ of each $1]

Fiscal Policy

Government uses spending and taxes to influence AD

Neoclassical Economic Theory

Laissez-faire focus on long-run supply-side growth (e.g., technology, education)

Keynesian Economic Theory

Focuses on short-run demand-side fixes (e.g., stimulus during recessions) [In the long-run, we are dead]

Long-Run "self-adjustment"

Economy returns to LRAS over time without government intervention b/c of lower wage expectations (prices/wages are "flexible" in the long-run)

Automatic Stabilizers

Policies that counter recessions/inflation without new laws (e.g., unemployment benefits, progressive taxes)

SRAS "Shifters"

Input costs (wages, oil), supply shocks, government regulations

AD "Shifters"

Changes in C, I, G, (X-M) (e.g., consumer confidence, interest rates, government spending)

Output (Y)

The amount of goods/services produced in the economy [Q(s) of the whole economy]

Actual Output (Y) versus Potential Output (Yf)

Y: Real GDP produced now

Yf: Max GDP at full employment (LRAS)

Inventories

Unsold supplies that "remains on the shelves" for businesses

Financial Asset

Claim on future income (e.g., stocks, bonds)

Bonds

Loans to governments/corporations (Usually government) that pay interest

Liquidity

Ease of converting assets to cash

Nominal Interest Rate (NIR)

The cost of a loan (expressed as a %) that does not account for inflation

Real Interest Rate (RIR)

(NIR - inflation rate) for interest [that does account for inflation]

Monetary Base (M0)

Physical currency + bank reserves

Money Supply (M1)

Cash + checkable deposits

Money Demand

The sum of the transaction demand and the asset demand for money; inversely related to NIR

Required Reserves

Cash banks must hold (set by Fed)

Excess Reserves

Extra cash banks can lend

Assets vs. Liabilities

Assets: Tangible and intangible property under a bank's control and/or possession

Liabilities: Others' legal claims on bank assets

Reserve Ratio

Required reserves / total deposits

Money Multiplier

1/Reserve Ratio → maximum money banks [banking system] can create from $$$ deposited

The Federal Reserve

Central bank managing U.S. money supply

Monetary Policy

Fed adjusts interest rates via the money supply or via administered rates to stabilize AD

Discount Rate

Interest rate Fed charges banks for loans from the Fed

Open Market Operations (OMO)

The Fed buying or selling bonds from/to banks to impact NIR

Reserve Requirement

% of deposits banks must hold

The Money Market

Where Fed influences short-term interest rates (via supply/demand for money)

The Loanable Funds Market

Where savers supply funds and borrowers demand loans (determines RIR)

Limited Reserves Framework

Fed targets NIR via money supply when reserves were scarce -> ex: RR [Reserve requirement], OMO, DR [Discount rate] (pre-2008)

Ample Reserves Framework

Fed uses IOR to control rates in a system with abundant reserves (post-2008)

Administered Rates

Interest rates set directly by the Fed (IOR, DR)

Interest on Reserves (IOR)

Rate Fed pays banks to hold reserves

Liquidity Preference

A general tendency for investors to prefer short-term (that is, more liquid) securities

Expansionary Fiscal Policy

↑ Government spending or ↓ taxes = ↑ AD (right shift)

Contractionary Fiscal Policy

↓ Government spending or ↑ taxes = ↓ AD (left shift)

Expansionary Monetary Policy

Central bank ↑ money supply (buy bonds, ↓ rates) → ↓ interest rates = ↑ AD

Contractionary Monetary Policy

Central bank ↓ money supply (sell bonds, ↑ rates) → ↑ interest rates = ↓ AD

Fed Funds Rate

Rate banks charge each other for overnight loans

Policy Rate

Central bank's benchmark rate to steer economy

Money Supply "Shifters"

OMO (buy/sell bonds): ↑Bond purchases → ↑Reserves → ↑Money supply [Inverse arrows also true]

Reserve ratio rate changes: ↑RR → ↓Excess reserves → ↓Money supply [Inverse arrows also true]

Discount rate changes: ↑DR → ↑Cost → ↓Money supply [Inverse arrows also true]

Money Demand "Shifters"

National Income (Y): ↑Income → ↑Money demand (more spending) [Inverse arrows also true]

Price Level (PL): ↑Prices → ↑Money demand (more $ needed for transactions) [Inverse arrows also true]

Demand Deposits

Checking accounts

Process of Money Supply Expansion (Via Deposits)

Deposit → bank keeps required reserves → lends to excess → gets spent → redeposit → repeat

Total money = Initial deposit × money multiplier (1/ required reserve ratio)