AP Macroeconomics Unit 5 Vocab

Cyclically adjusted budget balance

A measure of the budget balance that accounts for the effects of the business cycle.

Fiscal year

A year as reckoned for taxing or accounting purposes, often not aligning with the calendar year.

Public debt

The total amount of money that a government owes to creditors.

Debt-GDP ratio

A ratio that compares a country's public debt to its Gross Domestic Product (GDP).

Implicit Liabilities

Future payment obligations not formally recognized in accounting records.

Target federal funds rate

The interest rate at which banks lend reserve balances to other depository institutions overnight.

Expansionary monetary policy

A policy aimed at increasing the money supply to stimulate economic activity.

Contractionary monetary policy

A policy aimed at reducing the money supply to combat inflation.

Taylor rule for monetary policy

An equation that describes how central banks adjust interest rates in response to inflation and economic output.

Inflation targeting

A monetary policy strategy aimed at maintaining a specified rate of inflation.

Monetary neutrality

The proposition that changes in the money supply have no effect on real economic variables.

Classical model of the price level

A theory that explains price level as a direct result of the money supply.

Inflation tax

The reduction in purchasing power due to inflation that affects holders of cash.

Cost-push inflation

Inflation caused by an increase in prices of production factors.

Demand-pull inflation

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

Short-run Phillips Curve

A curve showing the inverse relationship between inflation and unemployment in the short run.

Nonaccelerating inflation rate of unemployment (NAIRU)

The level of unemployment at which inflation does not change.

Long-run Phillips Curve

A vertical curve showing no trade-off between inflation and unemployment in the long run.

Debt deflation

A theory stating that a fall in prices increases the real value of debt, leading to lower spending.

Zero bound

The lower limit on interest rates, which prevents them from falling below zero.

Liquidity trap

A situation where monetary policy becomes ineffective because nominal interest rates are at or near zero.

Macroeconomic policy activism

An approach that favors active government intervention in the economy.

Monetarism

A school of thought that emphasizes the role of governments in controlling the amount of money in circulation.

Discretionary monetary policy

A monetary policy that is implemented based on the discretion of policymakers.

Monetary policy rule

A guideline that central banks follow to determine the appropriate setting of monetary policy.

Quantity theory of money

A theory that links the money supply to price level and economic output.

Velocity of money

The rate at which money is exchanged in an economy.

Natural rate hypothesis

The theory suggesting that the economy will return to a natural rate of unemployment in the long run.

Political business cycle

Economic cycles that arise from political actions and decisions.

New classical macroeconomics

The school of thought that incorporates rational expectations and market clearing.

Rational expectations

The hypothesis that individuals form expectations about the future based on all available information.

New Keynesian economics

An approach that incorporates microeconomic foundations into Keynesian economics.

Real business cycle theory

A theory that business cycle fluctuations are caused by real (i.e., supply-side) factors.

Rule of 70

A method to estimate the number of years required to double the value of an investment.

Labor productivity

The amount of goods and services produced per hour of labor.

Physical capital

Tangible assets used in the production of goods and services.

Human capital

The skills, knowledge, and experience possessed by an individual or population.

Technology

The application of scientific knowledge for practical purposes.

Aggregate production function

A mathematical representation of the relationship between outputs and inputs in an economy.

Diminishing returns to physical capital

A principle stating that as more capital is added, the incremental gains in output eventually decrease.

Growth accounting

A method to estimate contributions to economic growth from various factors.

Total factor productivity

A measure of the efficiency of all inputs to a production process.

Convergence hypothesis

The theory that poorer economies will tend to grow at faster rates than richer ones.

Research and development (R&D)

The activities companies undertake to innovate and introduce new products or services.

Infrastructure

The basic physical systems of a country's transportation, communication, and utilities.

Sustainable

The ability to be maintained at a certain rate or level.

Depreciation

A decrease in the value of an asset over time.