AP Macroeconomics Unit 5 Terms

Economic growth

refers to the increase in the production of goods and services in an economy over time, usually measured by the rise in real Gross Domestic Product (GDP)

GDP per capita

A measure that calculates the economic output per person in a specific area, typically a country, by dividing the Gross Domestic Product (GDP) by the population

Productivity

refers to the efficiency with which goods and services are produced, typically measured as the output per unit of input, such as labor or capital. It is a crucial factor in economic growth, influencing a nation's ability to improve living standards, manage resources effectively, and respond to changing economic conditions.

Capital deepening; refers to the process of increasing the amount of capital per worker in an economy. It involves investing in more physical capital, such as machinery, equipment, and infrastructure, to enhance the productivity and output of each worker.

Human capital

refers to the skills, knowledge, and experience possessed by an individual or population, which are crucial for economic productivity and growth.

Physical capital

refers to the tangible assets used in the production of goods and services, such as machinery, buildings, tools, and equipment. It is crucial for enhancing productivity and efficiency in an economy, allowing businesses to produce more output with the same amount of labor. The accumulation and investment in physical capital are key factors driving economic growth and influencing the availability of resources in an economy.

Technological progress refers to the continuous advancement and improvement of technology, tools, and techniques that enhance productivity, efficiency, and the overall standard of living.

Definition. Public policy refers to the principles and decisions made by government authorities to address issues affecting society and the economy.

Infrastructure investment

refers to the allocation of financial resources towards the construction, maintenance, and improvement of essential public facilities and systems that support a country's economic and social development.

Education and training

enhance a nation's ability to adapt to changing economic conditions and technological advancements.

Research and development (R&D)

refers to the systematic activities undertaken by businesses and governments to create new products, services, or processes, or to improve existing ones. It is a critical component of economic growth and technological advancement.

Crowding out

The term that explains the negative impact that government spending can have on private investment. It suggests that when the government increases its spending, it will increase the demand for goods and services, which can lead to higher interest rates and inflation

Deficits and Debt

When a government's expenditures on goods, services, or transfer payments exceed their tax revenue, the government has run a budget deficit. Governments borrow money to pay for budget deficits, and whenever a government borrows money, this adds to its national debt.

A balanced budget

refers to a situation where a government's total expenditures are equal to its total revenues, resulting in no budget deficit or surplus.

Supply-side policies

economic strategies aimed at increasing the productive capacity of the economy by enhancing the supply of goods and services. These policies focus on incentivizing production through tax cuts, deregulation, and investments in human capital.

The loanable funds market

illustrates the interaction of borrowers and savers in the economy. Borrowers demand loanable funds, and savers supply loanable funds. The market is in equilibrium when the real interest rate adjusts to the point that the amount of borrowing equals the amount of saving.

The Laffer Curve

a theoretical representation that illustrates the relationship between tax rates and tax revenue. It suggests that there exists an optimal tax rate that maximizes revenue, beyond which increases in tax rates can actually lead to a decrease in total revenue due to reduced economic activity and incentive to earn income. (“You can only tax so much”

The Phillips Curve is an economic concept that illustrates the inverse relationship between inflation and unemployment in an economy in the short run. However, it illustrates that that there is no relationship between the unemployment rate and inflation in the long-run; also, the LRPC is vertical at the natural rate of unemployment.

The Taylor Rule

A monetary policy guideline which suggests that central banks should increase the fed funds rate when the expected inflation rate exceeds the target inflation rate or the anticipated GDP growth exceeds its long-term rate of growth.

Fiscal and Monetary Policies

Powerful tools governments use to steer economies. Fiscal policy involves government spending and taxation, while monetary policy focuses on controlling the money supply and interest rates through central bank actions. These policies can be expansionary or contractionary, aiming to stimulate growth or curb inflation.

Keynesian Theory

advocates for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of a recession.

During times of economic recession, the government should increase spending and lower taxes to stimulate economic growth. This statement most closely aligns with which economic theory?

Keynesian Theory

The best way to promote economic growth is to lower taxes on businesses and wealthy individuals, which will lead to increased investment and job creation. This approach represents:

Supply-side Economics

The Laffer Curve falls under which economic theory?

Supply-side theory

People make economic decisions based on their expectations of future government policies and economic conditions. This concept is central to:

Rational Expectations Theory

Controlling the money supply is the most effective way to manage inflation and maintain economic stability. This statement best reflects:

Monetarist Theory

Economic downturns are primarily caused by insufficient aggregate demand, which can be corrected through government intervention. This view is most associated with:

Keynesian Theory