Unit 5 AP Macro Vocab

Short-run Phillips Curve

represents the negative short-run relationship between the unemployment rate and the inflation rate.

Long-run Phillips Curve

shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience.

Quantity Theory of Money

emphasizes the positive relationship between the price level and the money supply; relies on the velocity equation (MxV=PxY).

Velocity of Money

the ratio of nominal GDP to the money supply; a measure of the number of times the average dollar bill is spent per year.

Budget Surplus

the difference between tax revenue and government spending when tax revenue exceeds government spending.

Budget Deficit

the difference between tax revenue and government spending when government spending exceeds tax revenue.

Government Debt

the accumulation of past budget deficits, minus past budget surpluses.

Debt-GDP Ratio

the government’s debt as a percentage of GDP.

Crowding Out

occurs when a government deficit drives up the interest rate and leads to reduced investment spending.

Labor Productivity

output per worker; also known simply as productivity.

Physical Capital

often referred to simply as capital—consists of manufactured productive resources, such as equipment, buildings, tools, and machines, used to produce other goods and services.

Human Capital

the improvement in labor created by the education and knowledge that is embodied in the workforce.

Technology

a technical means for producing goods and services.

Aggregate Production Function

a hypothetical function that shows how productivity depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology.

Diminishing Returns to Physical Capital

exhibited by an aggregate function when, holding the amount of human capital per worker and the state of technology fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity.

Depreciation

when the value of an asset is reduced by wear, age, or obsolescence; also, when a currency becomes less valuable in terms of other currencies.

Infrastructure

roads, power lines, ports, information networks, and other underpinnings for economic activity.

Supply Side Fiscal Policy

government policies that seek to promote economic growth by affecting short-run and long-run aggregate supply curves.

Incentive

rewards or punishments that motivate particular choices.rewards or punishments that motivate particular choices.