AP Macroeconomics Review

AP Macroeconomics Exam Review Flashcards

Scarcity

The inability of limited resources to satisfy our wants; when there is less of an item than is wanted, it has a positive price and requires sacrifice to obtain.

Factors of Production

The scarce resources that make up goods and services: land, labor, capital, and entrepreneurship.

Market-Based Economies

Economic systems that emphasize private property rights and use prices to distribute scarce resources and goods and services.

Command Economies

Economic systems where government bureaucrats allocate resources and goods and services through central planning.

Opportunity Cost

The value of the next best alternative not chosen; what you give up when making a choice.

Production Possibilities Curve

A curve showing all combinations of two goods that can be produced with fixed resources; points on the curve are productively efficient.

Constant Opportunity Costs

Shown by a linear production possibilities curve, indicating resources are perfectly adaptable between producing two goods.

Increasing Opportunity Costs

Shown by a bowed-out production possibilities curve, indicating resources are not perfectly adaptable between producing two goods.

Productive Efficiency

Any point of production on a production possibilities curve, meaning resources are fully utilized.

Inefficiency on PPC

Any point of production within the production possibilities curve, meaning some resources are idle.

Economic Growth

A greater quality or quantity of resources, or greater productivity of those resources, shown as an outward shift of the production possibilities curve.

Absolute Advantage

The ability to produce more of something, or the same amount with fewer resources.

Comparative Advantage

The ability to produce something at a lower opportunity cost than another entity.

Output Problem Opportunity Cost

Calculated using the 'other over' formula (opportunity cost of producing good A is good B / good A), used when numbers are finished products.

Input Problem Opportunity Cost

Calculated using the 'it over' formula (opportunity cost of producing one unit of A is A / B), used when numbers represent inputs.

Mutually Beneficial Terms of Trade

Terms of trade that fall between the two countries' or people's opportunity costs, benefiting both parties.

Law of Demand

Ceteris paribus, consumers buy more of a good at low prices and fewer units at high prices, giving a downward-sloping demand curve.

Demand Shifters

Factors that change demand include tastes and preferences, market size, prices of related goods (substitutes and complements), income (normal and inferior goods), and expectations for the future.

Law of Supply

A direct relationship between price and quantity; producers sell more at higher prices and less at lower prices, giving an upward-sloping supply curve.

Supply Shifters

Factors that shift supply include input prices, government tools (taxes, subsidies, regulations), number of sellers, technology, and prices of other goods producers can produce, and producer expectations.

Equilibrium

The price where quantity demanded equals quantity supplied; the market-clearing price.

Surplus

Occurs when the price is above equilibrium, quantity supplied is greater than quantity demanded, causing prices to fall.

Shortage

Occurs when the price is below equilibrium, quantity demanded is greater than quantity supplied, causing prices to rise.

Circular Flow Diagram

Shows the interactions between households and businesses. Households provide resources and buy products, while businesses buy resources and supply products.

Gross Domestic Product (GDP)

The total value of all final goods and services produced within a country during a calendar year.

Value Added Approach

Method of calculating GDP by summing the added value each company contributes to the final product value.

Income Approach to GDP

Method of calculating GDP by summing rent, wages, interest, and profit, with adjustments.

Output Expenditure Model

Method of calculating GDP by summing payments for goods and services: C (consumption) + IG (gross investment) + G (government purchases) + XN (net exports).

Per Capita GDP

GDP divided by the population; used as an indicator of a country's standard of living but has drawbacks.

Unemployment

To be considered unemployed, one must be not working and actively looking for work.

Unemployment Rate

The number of unemployed people divided by the labor force, times 100.

Labor Force

The number of people who are unemployed (actively looking for work) plus the number of people who are employed.

Labor Force Participation Rate

The labor force divided by the civilian working age population, times 100.

Frictional Unemployment

Unemployment due to movement between jobs or finding a first job.

Structural Unemployment

Unemployment due to changes in the economy rendering jobs obsolete or a skills mismatch between available jobs and unemployed workers.

Cyclical Unemployment

Unemployment caused by the business cycle; indicates a recession.

Natural Rate of Unemployment

The rate of unemployment when the economy is at long-run equilibrium in the ASAD model; frictional plus structural unemployment.

Inflation Rate

A general increase in prices within an economy. Measured with the CPI or the GDP deflator.

Nominal GDP

GDP that has not been adjusted for inflation. Calculated using current year's quantities and current year's prices.

Real GDP

GDP calculated using the base year's prices. Uses current year's quantities but base year's prices.

GDP Deflator

Calculated by taking nominal GDP, dividing by real GDP, and multiplying by 100.

Consumer Price Index (CPI)

Calculated by determining the value of a market basket of goods. Current year prices divided by base year prices, then multiplied by 100.

Disposable Income

Income minus taxes; can only be spent or saved.

Marginal Propensity to Consume (MPC)

The amount of new money that consumers are likely to spend; expressed as a decimal.

Marginal Propensity to Save (MPS)

The percentage of new income that will be saved.

Simple Spending Multiplier

1 / MPS or 1 / (1 - MPC); any new spending is affected by this multiplier and increases GDP.

Tax Multiplier

-MPC / MPS or -MPC / (1 - MPC); has an absolute value one less than the government spending multiplier.

Aggregate Demand Curve

A downward-sloping curve showing an inverse relationship between the price level and real GDP.

Short Run Aggregate Supply (SRAS)

Shows a direct relationship between real GDP and the price level; upward sloping because wages are sticky in the short run.

Long Run Aggregate Supply (LRAS)

Vertical at Yf (full employment level of output) because wages are flexible in the long run.

Inflationary Gap

Occurs when the current level of output is greater than the long-run potential output.

Recessionary Gap

Occurs when the current level of output is less than the full employment output.

Demand-Pull Inflation

Occurs when there is a positive demand shock to the economy, causing the price level and real output to increase.

Cost-Push Inflation

Occurs when there is a negative supply shock (stagflation), prices rise, and real output falls.

Expansionary Fiscal Policy

Used to fight unemployment; involves increasing government spending and/or decreasing taxes.

Contractionary Fiscal Policy

Used to fight inflation; involves decreasing government spending or increasing taxes.

Automatic Stabilizers

Cause the budget deficit to decrease during expansions and increase during contractions.

Money

A medium of exchange, a unit of account (yardstick), and a store of value.

Monetary Base

Includes bank reserves and currency (paper and coins).

M1 Money Supply

Includes currency, checkable deposits, and savings accounts.

M2 Money Supply

Includes all of M1 plus small time deposits and money market mutual funds.

Fisher Formula

Nominal Interest Rate - Inflation Rate = Real Interest Rate.

Money Multiplier

1 / Reserve Requirement; tells how many dollars worth of new loans, deposits, and money can be created from excess reserves.

Money Market

The market where the demand and supply of money determine the nominal interest rate.

Open Market Operations

Buying bonds (to increase money supply) or selling bonds (to decrease money supply).

Discount Rate

The interest rate that banks are charged by the central bank.

Reserve Requirement

Percentage of checkable deposits that cannot be loaned out by banks.

Expansionary Monetary Policy

Used to fight unemployment, involves buying bonds, lowering the discount rate, or lowering the reserve requirement.

Contractionary Monetary Policy

Used to fight inflation; involves selling bonds, raising the discount rate, or raising the reserve requirement.

Loanable Funds Market

The market where the demand for and supply of loanable funds determine the real interest rate.

Crowding Out

An increase in the budget deficit increases interest rates, decreases gross investment, leads to less capital formation, and decreases economic growth.

Economic Growth

An increase in potential GDP or per capita GDP (GDP divided by population).

Productivity

Output divided by worker hours. Increases through specialization, capital per worker, human capital, or increases in technology.

Phillips Curve

Shows the relationship between the unemployment rate and the inflation rate.

Balance of Payments

An accounting of transactions between countries, including the current account and the capital and financial account.

Current Account

Tracks transactions between countries for goods, services, investment income, and money transfers.

Financial and Capital Account

Tracks purchases of assets, including stocks, currency, and bonds.

Exchange Rates

The price of one currency in terms of another currency.