AP Economics Vocab

absolute advantage

being able to produce at a lower cost

Aggregate Demand (AD)

the sum of all demand in an economy

Aggregate Expenditure (AE)

the sum of macro spending; C+G+I+(x-m)

Aggregate Income (AI)

the sum of macro earnings; wages+profits+interests+rent

allocative efficiency

all goods and services are optimally distributed among buyers

Ample reserves

banking system structure needs changes to administrated rates to effectively change the nominal interest rate(NIR)

automatic stabilizers

built in fiscal policy tools

balance of payments

A yearly record of all economic transactions between residents of one country and the ROTW

bank balance sheet

T account showing assets and liabilities

capital

equipment and tools used to produce

Capital inflows

foreign savings; proceeds from sales of US assets overseas

capital investment

total firm expenditures on capital, net inventories (& new homes); it is based on borrowing

Capital outflows

domestic purchases of foreign financial assets; foreign financial investment

causation fallacy

assuming that because two things are correlated that one caused the other

ceteris paribus

all things being constant

comparative advantage

being able to produce at a lower opportunity cost

Complements

products that consumers purchase to go with other purchases; their cross price elasticity is negative

composition fallacy

assuming that what is true for the individual is true for the whole

Constant Marginal Returns

Along the production function, when MP of a change in one input is the same as the last input (SR)

Consumer Price Index (CPI)

most common measure of inflation; based on price of a fixed set of goods

consumer surplus

the difference between market price and consumer demand

Consumption (C)

total household expenditures on new goods and services

cost

$ measure of production inputs; supply issue

cost-push inflation

inflation caused by an increase in overall production costs

cross-price elasticity

measure of sub/comp demand responsiveness to price change of related product

crowding out

G borrowing that competes with capital I borrowing; increases demand of loanable funds

current account

the balance of trade on goods, services, and money transfers

cyclical unemployment

laborers lose jobs during an economic downturn

deadweight loss

net loss to society due to tax, market failure or any market inefficiency (trade restrictions)

Deflation

any decrease in the overall price level

Demand

the amount a consumer is willing and able to purchase at all possible prices; the relationship is negative

demand-pull inflation

inflation caused by too much demand (C,I,G,M)

Depreciation

capital that becomes obsolete during the year; used up stuff

Desposable Income

income available to households for spending and saving; AI-NT

Diminishing marginal returns

Along the production function, when MP of a change in one input is falling (SR)

Diminishing marginal utility

the law that states utility will fall with additional consumption (at one time)

discount rate

the interest rate charged to banks by the central bank for overnight loans(top administrated rate)

Disinflation

any decrease in inflation

division of labor

separation of work into a number of tasks

economics

the study of how people make decisions among trade-offs, or- how they use their limited resources to satisfy their unlimited wants

elastic

relatively responsive to change; \>1

Entrepreneurship

organizational skills, motivation and risk taking needed to produce

exchange rate

The price of purchasing foreign currency

factor market

market where firms purchase resources (FOPs) from households

financial (or capital) account

The balance of international asset purchases

financial asset

the representation of future payments; ex. Stock, bond, loan

fiscal policy

the use of government spending, transferring, taxing and borrowing to steer the macro economy

fiat money

money with no inherent value, not backed by a commodity like gold or silver

foreign exchange

foreign money needed to carry out international transactions

Frictional unemployment

when job seekers and employers need time to find each other

Government spending (G)

total government expenditures on new goods and services; does not include transfer payments

Gross domestic product

total value of final goods and services produced in a year

Hyperinflation

severe inflation

Income Elasticity

measure of consumers' demand responsiveness to income change; (-) is inferior good

Increasing marginal returns

along the production function, where MP of a change in one input is growing (SR)

Inelastic

relatively unresponsive to price changes;

Inferior good

demand decreases as income increases; vice versa

Inflation

any increase in the overall price level

inflationary gap (expansionary)

SR GDP beyond LRAS

interest

the payment for capital

interest on reserve balance(IORB)

overnight interest rate paid by the central bank(bottom administrated rate)

interest rate

the price of borrowing money; the earnings for saving or lending

Intermediate good

good that is not final; will become part of another good

labor

the physical and mental effort used to produce

Labor force

16yr or older who either are looking for work or employed; about 66% of adults in US

land

natural resource or material used to produce (may be refined)

limited reserves

banking system structured so that changes to M1 can effectively change the nominal interest rate(NIR)

liquid/liquidity

the ability to change an asset to cash

loanable funds market

the S/D of savings that is able to be borrowed(RIR)

LR Aggregate Supply (LRAS)

potential output in an economy; full employment; 4-6% unemployment, LRPC

macroeconomics

the study of the economic behavior of entire economies

marginal

incremental, one more, or the next one

marginal cost

change in TC / change in Q or output; change in VC / MPL

Marginal Propensity to Consume (MPC)

likelihood that households spend their additional earnings

Marginal Propensity to Save (MPS)

likelihood that households save their additional earnings

market

any place where consumers and producers meet to exchange

Market Equilibrium (price)

where supply meets demand; the most product is sold; MC\=MB, prevailing sale amount

Market Supply

the sum of all individual suppliers in a market

microeconomics

the study of the economic behavior of individuals and specific markets

monetary base

M0, currency in circulation and bank reserves

monetary policy

central bank regulation of the money supply to steer the macro economy

money market

the S/D of M1 is measured in interest rate(NIR)

money multiplier

1/rr; the factor by which M1 grows as a result of new money creation (loans)

money supply

M1; cash + savings + checking accounts

mu/$

change in utility/price; bang for your buck

national savings

total savings after government budget has been accounted to

Negative marginal returns

Along the production function, when MP of a change in one input is less than zero (SR)

Net Domestic Product (NDP)

GDP minus depreciation

net exports

Exports - Imports (X - M)

Net taxes (NT)

taxes-transfer payments; T-TP

Nominal

not adjusted for inflation

Normal good

demand for this good increases as income increases; vice versa

normative statement

a statement based on opinion or what should be

NROU/ normal(full) employment

when cyclical unemployment is zero; 4-6% unemployment rate

Open-Market Operations (OMOs)

the buying and selling of government securities (bonds)

opportunity cost

your most valuable trade-off

Optimal Consumption

max total utility; buy more or less of a product until mu/$ is the same

percent change

(new -old) / old; it's relative to increases or decreases

perfectly elastic

flat demand curve; consumers are perfectly price sensitive

Phillips Curve (SR and LR)

graph showing the trade off between unemployment and inflation