Unit 1-6 Ap Macroeconomics Vocab

Phillips Curve

Shows the tradeoff between inflation and unemployment

Short Run Phillips Curve

Overheating economy means low unemployment and high inflation, recession means high unemployment and low inflation

Long Run Phillips Curve

No tradeoff between inflation and unemployment, represents Natural Rate of Unemployment

Velocity of money

Average times a dollar is spent and respent in a year

Budget deficit

When annual government spending and transfer payments are greater than tax revenue

Budget surplus

When annual government spending and transfer payments are less than tax revenue

Entitlements

Federal program that requires payments to eligible people or units of governments like Social Security

Crowding out

Adverse effect of government borrowing on interest-sensitive private sector spending

Growth rate

Change in real GDP per capita over time

Supply side fiscal policy

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

Trade surplus

 Exporting more than is imported

Trade deficit

Exporting less than is imported

Balance of payments (BOP)

Summary of a country's international trade prepared in domestic currency

Current Account (CA)

Made up of net exports, investment income, and net transfers

Investment income

Income from the factors of production including payments to foreign investors

Net transfers

Money flows from the private and public sectors

Capital and Financial Account (CFA)

Measures the purchase and sales of financial assets abroad and purchases of things that continue to earn money

Foreign Direct Investment

Foreign company buys businesses in a different country

Net Capital Outflow

Difference between the purchase of foreign assets and domestic assets purchased by foreigners

Exchange rate

Price of one currency relative to another currency

Depreciation

Loss of value of a country's currency compared to a foreign currency

Appreciation

Increase of value of a country's currency compared to a foreign currency

Fixed exchange rate

Government actively manages the country's currency

Floating exchange rate

Market determines the value of the country's currency

Quantity Theory of Money =

Money supply x Velocity = Price level x Y

Y = Quantity of output

P x Y = Nominal GDP

Balance of payments =

Current Account + Capital and Financial Account = 0

Financial Sector

Network of institutions that link borrowers and lenders

Asset

Anything tangible or intangible that has value

Interest rate

Amount a lender charges a borrower for borrowing money

Interest-bearing asset

Asset that earned interest over time like bonds

Liquidity

Ease with which an asset can be converted into a medium of exchange/money

Bonds

Loans or IOUs that represent debt by governments, businesses or individuals that must be repaid to the lender

Stocks

Represent ownership of a corporation and the owner is often entitled to a portion of the profit paid out as dividends

Real interest rate

Percentage increase in purchasing power that a borrower pays that is adjusted for inflation

Nominal interest rate

Percentage increase in money that the borrower pays that is not adjusted for inflation

Present value

Current worth of some future amount of money

Money

Anything generally accepted as payment for goods and services

Wealth

Total collection of assets

Income

Flow of earnings per unit of time

Commodity money

Something that performs the function of money and has intrinsic value like gold or cigarettes

Fiat money

Something that serves as money but has no other value or use like paper money

Purchasing power

The amount of goods and services a unit of money can buy

Fractional reserve banking

Bank holds a portion of deposits for withdrawals and loans out the rest

Demand deposits

Money deposited in a commercial bank

Required reserves

Percent that banks must hold by law

Excess reserves

 Amount that the bank can loan out

Balance sheet

A record of a bank's assets, liabilities, and net worth

Transaction demand for money

People hold money for everyday transactions

Asset demand for money

People hold money since it is less risky than other assets

Federal Reserve System/Board or The Fed

Nonpartisan government office that adjusts the money supply to influence the economy

Discount rate

The interest rate that the Fed charges commercial banks

Open market operations

When the Fed buys or sells government bonds to affect money supply

Federal funds rate

Interest rate that banks charge one another for one-day loans of reserves

Loanable funds market

Shows supply and demand of loans and the equilibrium real interest rate

Private saving

Amount that households save instead of consume

Public saving

Amount that the government saves instead of spends

National saving

Public saving + private saving

Capital inflow

Amount of money entering the country

Capital outflow

Amount of money leaving the country

Net capital inflow

Capital inflow - capital outflow

Private investment

Borrowing by businesses and consumers

Government investment

Deficit spending when government spending is greater than tax revenue

Real interest rate =

nominal interest rate - expected inflation

Nominal interest rate =

real interest rate + expected inflation

Present value of $X in 1 year =

$X/(1 + ir)^n

 Future value of $X in N years =

$X(1 + ir)^n

Money multiplier =

1/Reserve requirement (ratio)

Aggregate

Added all together

Aggregate demand AD

All the goods and services that buyers ware willing and able to purchase at different price levels, real GDP

Wealth effect/Real balance effect

Higher price levels reduce the purchasing power of money and decreases quantity of expenditures and vice versa

Interest rate effect

For price level increases, lenders need to charge higher interest rate to get a real return on loans, high interest rates discourage consumers and investing

Foreign trade effect

 When your price level rises, exports falls and imports rise causing real GDP

Multiplier effect

Initial change in spending will set off a magnified, spending chain

Marginal Propensity to Consume MPC

How much people consumer rather than save when there is a change in disposable income, expressed as a fraction/decimal

Marginal Propensity to Save MPS

How much people save rather than consume when there is a change in disposable income, expressed as a fraction/decimal

Aggregate Supply AS

Amount of goods and services (real GDP) that firms will produce in an economy at different price levels

Short-run aggregate supply SRAS

Wages & resources prices are sticky & won't change as price level changes

Long-run aggregate supply LRAS

Wages & resource prices are flexible & will change as price level changes

Stagflation

Stagnant economy + inflation causes a recessionary gap

Demand-pull inflation

Demand pulls up prices and causes aggregate demand to increase

Cost-push inflation

Higher production costs increase prices causing SRAS to decrease

Autonomous consumption

Amount consumers will spend regardless of income to pay for necessities

Disposable income

Income after taxes

Dissaving

Negative savings

Fiscal policy

Actions by Congress to stabilize the economy

Monetary policy

Actions by the Federal Reserve Bank to stabilize the economy

Discretionary fiscal policy

New bill to change AD through government spending or taxation but lags

Non-discretionary fiscal policy/automatic stabilizers

Permanent spending or taxation laws to work counter cyclically to stabilize the economy

Contractionary fiscal policy

Laws that reduce inflation and decrease GDP by decreasing government spending and increases taxes to close an inflationary gap

Expansionary fiscal policy

Laws that reduce unemployment and increase GDP by increasing government spending and decreasing taxes to close a recessionary gap

Inflationary gap/positive output

Above or beyond full employment

Recessionary gap/negative output gap

Below or less than full employment

Shifter of Aggregate Demand =

AD = GDP = C + | + G + Xn =

change in Consumer spending + change in Investment spending + change in Government spending + change in Net Exports (X-m)

Marginal Propensity to Consume MPC =

Change in Consumption/Change in disposable income

Marginal Propensity to Save MPS =

Change in Savings/Change in disposable income

MPS =

1 - MPC

Spending Multiplier =

1/MPS or 1/(1-MPC)

Total Change in GDP =

Spending Multiplier x Initial change in Spending

Simple Tax Multiplier =

MPC x (1/MPS) or MPC/MPS

Total Change in GDP =

Tax Multiplier x Initial change in Taxes