Unit 5 Vocabulary - AP Econ

Cyclically adjusted budget balance

A measure of a government's budget balance that accounts for fluctuations in the economic cycle, providing a better assessment of the structural balance.

Fiscal year

A one-year period that governments and businesses use for financial reporting and budgeting, which may not align with the calendar year.

Public debt

The total amount of money that a government owes to creditors, comprising both domestic and foreign debt.

Debt-GDP ratio

A metric used to measure a country's public debt in relation to its gross domestic product (GDP), indicating the country's ability to pay back its debt.

Implicit Liabilities

Future obligations of the government that arise from existing policies and programs, such as social security and pensions.

Target federal funds rate

The interest rate at which banks lend to each other overnight, which the Federal Reserve sets to influence economic activity.

Expansionary monetary policy

A form of monetary policy that aims to increase the money supply and lower interest rates to stimulate economic activity.

Contractionary monetary policy

A monetary policy aimed at reducing the money supply and increasing interest rates to combat inflation.

Taylor rule for monetary policy

A guideline for how central banks should change interest rates in response to changes in economic conditions, particularly inflation and output.

Inflation targeting

A monetary policy strategy where a central bank aims to maintain a specified inflation rate.

Monetary neutrality

The idea that changes in the money supply only affect nominal variables like prices and wages, but have no impact on real variables such as real GDP.

Classical model of the price level

An economic theory that sets prices based on supply and demand with the assumption that the economy is always in equilibrium.

Inflation tax

The loss of purchasing power due to inflation, which acts like a tax on cash holdings.

Cost-push inflation

Inflation caused by an increase in prices of production inputs like labor and raw materials, leading to higher overall prices.

Demand-pull inflation

Inflation that occurs when demand for goods and services exceeds their supply.

Short-run Phillips Curve

A representation of the inverse relationship between the rate of inflation and the rate of unemployment in the short run.

Nonaccelerating inflation rate of unemployment (NAIRU)

The level of unemployment at which inflation is stable; it does not accelerate or decelerate.

Long-run Phillips Curve

A vertical line at the natural rate of unemployment, illustrating that in the long run, there is no trade-off between inflation and unemployment.

Debt deflation

The reduction in general price levels due to the increase in the real value of debt, leading to a contraction in economic activity.

Zero bound

The lower limit of interest rates, where they cannot decrease further, leading to potential limits on monetary policy effectiveness.

Liquidity trap

A situation in which monetary policy becomes ineffective because the nominal interest rate is at or near zero, and savings rates are high.

Macroeconomic policy activism

The approach advocating for active government intervention through fiscal and monetary policy to manage economic fluctuations.

Monetarism

An economic theory emphasizing the role of governments in controlling the amount of money in circulation to influence the economy.

Discretionary monetary policy

Monetary policy that is subject to the discretion of policymakers, rather than being rule-based.

Monetary policy rule

A rule-based approach to setting monetary policy, providing consistent guidelines for interest rate adjustments.

Quantity theory of money

An economic theory that relates the quantity of money in an economy to its price level and output.

Velocity of money

The rate at which money circulates in the economy, indicating how quickly money is spent.

Natural rate hypothesis

The theory suggesting there is a level of unemployment that prevails in an efficient market at which inflation does not accelerate.

Political business cycle

Fluctuations in economic activity that are caused by political actions, such as changes in government spending or taxation.

New classical macroeconomics

A school of thought challenging Keynesian economics, asserting that markets clear and expectations are rational.

Rational expectations

The theory that people form their expectations about the future based on all available information, affecting their economic decisions.

New Keynesian economics

An economic theory that builds on Keynesian ideas but incorporates aspects such as price stickiness and market imperfections.

Real business cycle theory

An economic theory that attributes business cycle fluctuations to real (i.e., non-monetary) shocks to productivity.

Rule of 70

A formula to estimate the number of years it takes for a quantity to double in size, calculated by dividing 70 by the annual growth rate.

Labor productivity

The amount of goods and services that a worker produces in a given amount of time, usually measured as output per hour.

Physical capital

Tangible assets such as machinery, buildings, and equipment used to produce goods and services.

Human capital

The skills, knowledge, and experience possessed by individuals, which can contribute to economic productivity.

Technology

The application of scientific knowledge for practical purposes, especially in industry and production.

Aggregate production function

A mathematical representation that shows how total economic output depends on various inputs like labor and capital.

Diminishing returns to physical capital

The principle that as more physical capital is added, the additional output generated from that capital will eventually decrease.

Growth accounting

A method for measuring the contribution of different factors of production to economic growth.

Total factor productivity

A measure of the efficiency with which all factors of production are used to produce output.

Convergence hypothesis

The theory suggesting that poorer economies will tend to grow at faster rates than richer ones, eventually converging in income levels.

Research and development (R&D)

Activities undertaken by companies or governments with the aim of developing new products or processes.

Infrastructure

The basic physical systems and facilities serving a country, city, or area, including transportation, communication, water, and power.

Sustainable

Economic practices that meet the needs of the present without compromising the ability of future generations to meet their own needs.

Depreciation

The reduction in value of an asset over time, particularly due to wear and tear or obsolescence