AP Macroeconomics Exam Study Guide Flashcards

Comprehensive vocabulary flashcards covering Fiscal Policy, Monetary Policy, Economic Growth, Inflation, Unemployment, and the Extended Model for AP Macroeconomics.

Expansionary Fiscal Policy

A policy used to address a recessionary gap by increasing $G$ (multiplier) or decreasing $T$ ($DI imes MPC$), which increases $AD$ and causes a deficit.

Contractionary Fiscal Policy

A policy used to address an inflationary gap by decreasing $G$ (multiplier) or increasing $T$ ($DI imes MPC$), which decreases $AD$ and causes a surplus.

Bond Market (Deficit)

When the government issues bonds to finance a deficit, the supply of bonds increases, causing bond prices to decrease and interest rates to increase.

Loanable Funds Market (Deficit)

The government borrows from commercial banks, causing the demand for loanable funds to increase and the real interest rate to increase.

Economic Growth

Occurs when $LRAS$ shifts to the right or $PPC$ shifts outward, driven by capital formation (machines, tools, equipment) and increases in labor force participation or education.

Phillips Curve

A graph showing the tradeoff between unemployment and inflation; movement along it is due to changes in $AD$.

Long-Run Phillips Curve ($LRPC$)

A vertical line indicating no long-run tradeoff between unemployment and inflation.

Demand Pull Inflation

Inflation caused by increases in $AD$ ($C$, $I_g$, $G$, or $X_n$) leading to increases in price, output, and employment.

Cost Push Inflation (Stagflation)

Inflation caused by decreases in $AS$ due to supply shocks, wage changes, or increased production costs, leading to higher prices and lower output.

Real vs. Nominal Numbers

Real numbers are adjusted for inflation using the formula: $ext{Nominal } [100] - ext{Inflation } [100] = ext{Real } [100]$.

Unanticipated Inflation Winners/Losers

Hurts savers, lenders, and fixed income receivers; helps debtors (borrowers) who pay back dollars worth less.

Natural Rate of Unemployment ($Q_f$)

The unemployment rate consisting of Frictional + Structural unemployment, occurring at the vertical $LRAS$.

Unemployment Rate Formula

$(\frac{ ext{unemployed}}{ ext{labor force}}) imes 100$.

Labor Force Participation Rate Formula

$(\frac{ ext{Labor Force}}{ ext{population that could be in labor force}}) imes 100$.

Reserve Ratio

The percentage of demand deposits ($DD$) that commercial banks cannot lend out.

Discount Rate

The interest rate charged by the Federal Reserve to commercial banks for loans.

Open Market Operations

The Fed's tool of buying or selling securities to change excess reserves, interest rates, and $AD$.

Easy Money Policy (Limited Reserves)

A policy to fix a recession by decreasing the reserve ratio, decreasing the discount rate, or buying securities to increase excess reserves and $S_m$.

Tight Money Policy (Limited Reserves)

A policy to fix inflation by increasing the reserve ratio, increasing the discount rate, or selling securities to decrease excess reserves and $S_m$.

Monetary Multiplier

Calculated as $\frac{1}{ ext{reserve ratio}}$.

Money Creating Potential

$ext{Excess Reserves} imes ext{Monetary Multiplier}$.

GDP Gap

The difference between equilibrium $GDP$ and full employment $GDP$ ($Q_f$).

Spending Multiplier

$\frac{1}{MPS}$.

Supply of Loanable Funds

Shifts right (lowering real interest rates) when savings increase, or left (raising real interest rates) when people take money out of banks or the Fed uses tight money policy.

Demand of Loanable Funds

Increases, raising real interest rates, when the government borrows to finance a deficit or when $GDP$ rises ($D_t$ increases).

Self-Correction (Recession)

Layoffs cause wages to fall, lowering production costs and shifting $SRAS$ to the right back to $Q_f$.

Frontier (PPC)

Shows all combinations of production when at full employment, where only frictional and structural unemployment exist.

Inefficient (PPC)

A point inside the curve showing cyclical unemployment.

Unattainable (PPC)

Points outside the curve that are impossible with current resources and technology.

Ample Reserves

When the Fed has a large amount of reserves and uses administered rates (to change policy rates) rather than $OMO$ or reserve ratios.

$M_0$ (Monetary Base)

$ext{Currency} + ext{Reserves}$.

$$M_1$$

$ext{Currency} + ext{Demand Deposits}$ ($DD$).

$$M_2$$

$M_1 + ext{savings} + ext{small time deposits} + ext{money market accounts}$.

Balance of Payments

$ext{Current Account} + ext{Capital Account} = 0$.

Income Approach ($GDP$)

An approach summarized by $WRIPINDS$: wages, rent, interest, profits, indirect bus tax, net foreign factor, depreciation, and statistical discrepancy.

Aggregate Production Function

Shows that productivity or output per capita is positively related to physical capital per worker, human capital per worker, and technology.