AP Macro Review Units 2-6

define factor payments

income earned by the owners of the four factors of production

define transfer payments

payments made by the government without any goods or services exchanged. This includes welfare, unemployment compensation, and subsidies.

what is the expenditures approach

a method to calculate the GDP by summing all the spending on goods and services

Identify things not included in the GDP (4 things)

1) used goods

2) Intermediate goods

3) non-market transactions (illegal)

4) non-production spending (bonds)

Labor Force participation rate equation

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

Unemployment rate equation

(number of people unemployed / number of people in the labor force) * 100

Define frictional Unemployment

people who are btwn jobs ( someone who just got out of college looking for a job)

Define structural unemployment

people who have no skills for their work because the structure of the labor force has changed (technology)

Cyclical unemployment

no one can get job because of rescission

What is the natrual Rate of unemployment

the economy is at fully employment when there is only structural and frictional Unemployment

T or F: structural and frictional UE always Exists

True

CPI Equation

(value of market basket in given year / value of market basket in the base year) * 100

what is the subsitution bias in regards to the CPI?

when the CPI fails to account for consumers switching to cheaper alternatives as prices change, leading to an overestimation for the cost of living

GDP deflator equation

nominal GDP / real GDP * 100

how is GDP deflator different from CPI

accounts for all goods and services produced in the economy and not just market baskets

Spending Multiplier equation

1/1-MPC

Tax multiplier equation

1 - 1/MPS or MPC/MPS

Describe how an economy self-adjusts in the LR when there is a negative output gap.

A decrease in resource prices and wages causes SRAS to shift right

Describe how an economy self-adjusts in the LR when there is a positive output gap.

An increase in expected inflation causes wages to increase which would shift the SRAS to the left

If an economy is at full employment, however government spending increases, how will the economy adjust in the LR?

The AD would initially increase which would raise price levels. This causes an increase in wages and resource prices which would shift supply back to the left.

Do interest rates and bond prices have a negative or positive relationship?

negative

what is M1

total amount of physical cash in circulation, the amount of reserces, and money that is readily available for transactions w

what is M2

M1 + certificates of deposits and money market mutual funds

why is money supply vertical?

the MS is set by the central bank and is unrelated to the NIR.

define discount rate

IR the feds charge the bank

define the federal funds rate

IR that the banks charge eachother

Do OMO’s initially change the MS, MO, or both

initially changes excess reserves which is part of the MO

T or F: When commercial banks buy Bonds from the central bank the money supply increases

False

Are OMO’s effective when the bank has ample Reserves?

No because when a bank holds a large amount of reserve, a change in the MS from the OMO has little effect on the IR

Define IOR

the IR that the federal reserve pays commercial banks to hold reserves

What does a positive output gap look like on the Phillips curve?

High inflation, low UE

What does a negative output gap look like on the Phillips Curve?

Low inflation, High UE

If there is a negative supply shock, how would that affect the phillips curve.

The SRPC would shift right because that would then result in high inflation and high UE which is what happens when supply shifts left — OMG STAGFLATION.

If AD increases what happens to the SRPC

The point moves left - High inflation, low UE

If AD decreases what happens to the SRPC

the point moves right - low inflation, high UE

What is the equation for the quantity theory of money?

M V = P * Y

Define velocity of money

the average times a dollar is spent and re-spent in a year

For a negative output gap what fiscal policy would work?

Increase government spending, decreases taxes

For a positive output gap what fiscal policy would work?

decrease government spending, increase taxes

For a negative output gap what monetary policy would work?

decrease RRR, decrease DR, buy Bonds

For a positive output gap what monetary policy would work?

increase RRR, increase DR, sell bonds

If a bank has ample Reserves, what would they need to do in order to decrease interest rates?

they would need to decrease their IOR.

If a bank has ample Reserves, what would they need to do in order to increase interest rates?

increase IOR

If the money supply increases does real GDP also increase?

No it remains unchanged

define crowding out

The consequences of government borrowing on interest-sensitive private sector spending

If investment spending increases, what is the effect on the AD-AS graph in the long run?

AD shifts right in the SR, AS also shifts right, and then LRAS shifts right

What is supply-side fiscal policy

government policies designed to increase production by reducing business taxes and/or regulations

When a currency appreciates what happens to exports

they decrease because products become more expensive for foreigners

define net capital outflow

the difference btwn the purchase of foreign assets and domestic assets purchased by foreigners