AP Microeconomics Unit 0: Macroeconomics Review

A comprehensive set of vocabulary flashcards covering key macroeconomic indicators, the Federal Reserve, monetary policy, and fiscal policy based on the lecture notes.

Consumer Price Index (CPI)

A statistic reported monthly that measures the change in value of a basket of goods and services purchased by the average urban consumer.

CPI Formula

$$\text{CPI} = \frac{\text{cost of basket this year}}{\text{cost of basket in base year}} \times 100$$

Inflation

A sustained increase in the price level over time.

Inflation rate formula

$$\text{Inflation rate} = \frac{\text{new CPI} - \text{old CPI}}{\text{old CPI}} \times 100$$

Aggregate Demand (AD)

The total quantity of all goods and services consumers are willing and able to purchase at each price level; the curve is downward sloping showing an inverse relationship between price level and real GDP.

Determinants of Aggregate Demand

Changes in spending on Consumption, Investment, government, or exports.

Aggregate Supply (AS)

The total quantity of final goods and services producers are willing and able to supply at each price level.

Determinants of Aggregate Supply

Changes in resource prices, government actions, or productivity.

Medium of exchange

A function of money where it is anything used to determine value in an exchange.

Unit of account

A function of money where it is used as a basis of comparison of the value of goods.

Store of value

A function of money where it can be saved for later and maintain its value.

Money Supply

All the money in circulation; it is monitored and manipulated by the Federal Reserve to achieve economic goals.

Federal Reserve

The central bank of the United States.

Board of Governors

Seven members appointed by the President and confirmed by the Senate who serve 14-year terms; they also serve on the FOMC.

Federal Open Market Committee (FOMC)

The major body for conducting monetary policy, consisting of the 7 Board of Governors and 5 Federal Reserve Bank Presidents.

Monetary Policy

The Federal Reserve's actions, as a central bank, to achieve Congress-specified goals of maximum employment, stable prices, and moderate long-term interest rates.

Open market operations

The most used tool of monetary policy involving the buying and selling of government bonds by the Federal Reserve to move the federal funds rate and change the money supply.

Discount rate

The interest rate the Federal Reserve charges member banks for loans.

Reserve requirement

The percentage of deposits banks must keep in reserve rather than loaning out.

Interest on reserves

The interest paid by the Federal Reserve on reserves that banks keep with the Fed.

Easy monetary policy

Used during unemployment or recession; involves buying bonds and lowering the discount rate, reserve requirement, and interest on reserves to increase the money supply.

Tight monetary policy

Used when the economy is overheating or experiencing inflation; involves selling bonds and raising the discount rate, reserve requirement, and interest on reserves to decrease the money supply.

Fiscal policy

Legislation by the government changing taxation and/or government spending to stabilize the economy.

Expansionary fiscal policy

Policy used for unemployment or recession involving lowering taxes, issuing stimulus checks, or increasing government spending.

Contractionary fiscal policy

Policy used for inflation involving raising taxes or lowering government spending.

Budget deficit

Occurs when government expenses exceed taxes collected, requiring borrowing to cover spending.

Crowding out

When the government sells bonds to fund deficit spending, it creates upward pressure on interest rates and limits private borrowing by companies.

Budget surplus

Occurs when government taxes collected exceed government spending.

National debt

All the money owed by the federal government to bondholders.