ap macro unit 5/6 vocab

annually balanced budget

a budget in which government expenditures and tax collections are equal each year

budget deficit

a shortfall of tax revenue from government spending

budget surplus

an excess of tax revenue over government spending

classical model/view

model in which the real quantity of money is always at its long-run equilibrium level

cost-push inflation

When prices rise due to an increase in the cost of production.

crowding out effect

the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

cyclically balanced budget

a budget philosophy calling for budget deficits during recessions to be financed by budget surpluses during expansions

debt deflation

the reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation

demand-pull inflation

increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand

discretionary monetary policy

the use of changes in the interest rate or the money supply to stabilize the economy

disinflation

a reduction in the rate of inflation

inflation tax

the revenue the government raises by creating money

functional finance

A budget philosophy using fiscal policy to achieve the economy's potential GDP, rather than balancing budgets either annually or over the business cycle

laffer curve

shows the relationship between the size of the tax and tax revenue

liquidity trap

a situation in which conventional monetary policy is ineffective because nominal interest rates are up against the zero bound

Phillips Curve

a curve that shows the short-run trade-off between inflation and unemployment

macroeconomic policy activism

the use of monetary and fiscal policy to smooth out the business cycle

monetarism

the belief that inflation occurs when too much money is chasing too few goods

monetary neutrality

the proposition that changes in the money supply do not affect real variables

monetary policy rule

a formula that determines the central bank's actions

natural rate hypothesis

the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation

nonaccelerating inflation rate of unemployment

the full employment rate of unemployment; when employment falls below this rate, inflation accelerates

political business cycle

results when politicians use macroeconomic policy to serve political ends

public debt

all of the money borrowed by the government and not yet repaid, plus the accrued interest on that money; also called the national debt or federal debt

quantity theory of monetary policy

emphasizes the positive relationship between the price level and the money supply; relies on the velocity equation

rational expectations

the theory that people optimally use all the information they have, including information about government policies, when forecasting the future

real business cycle

A cycle that results from fluctuations in the pace of growth of labor productivity and potential GDP.

stagflation

a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)

zero bound

nominal interest rate cannot go below zero

convergence hypothesis

international differences in real GDP per capita tend to narrow over time

coordination failure

a situation in which workers and employers fail to achieve an outcome that all would prefer

depreciation

A decrease or loss in value

diminishing returns to physical capital

in an aggregate production function when the amount of human capital per worker and the state of technology are held fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity.

network effect

describes how products in a network increase in value to users as the number of users increases

rule of 70

Doubling time (in years) = 70/(percentage growth rate).

sustainability

meeting the needs of the present without compromising the ability of future generations to meet their own needs

total factor productivity

the amount of output that can be achieved with a given amount of factor inputs

appreciation

An increase in the value of a currency

balance of payments on accounts

national accounts that track both payments to and receipts from foreigners

balance of payments on goods and services

the difference between its exports and its imports during a given period

capital inflow

the net inflow of funds into a country

capital outflow

the amount of money leaving the country

capital intensive commodities

commodities that require relatively large amounts of money and other financial resources in its production

devaluation

lowering the value of a nation's currency relative to other currencies

dumping

Selling goods in another country below market prices

exchange rate

The measure of how much one currency is worth in relation to another.

foreign exchange market

a market in which currencies of different countries are bought and sold

foreign exchange reserves

stocks of foreign currency that governments maintain to buy their own currency on the foreign exchange market

GATT

General Agreement on Tariffs and Trade

G7

Group of seven leading industrial countries: Canada, France, Germany, Italy, Japan, United Kingdom, United States

G8

The following group of eight industrialized nations: Britain, Canada, France, Germany, Italy, Japan, Russia, and the United States.

import quota

a limit on the number of products in certain categories that a nation can import

international monetary fund

a United Nations agency to promote trade by increasing the exchange stability of the major currencies

NAFTA

North American Free Trade Agreement; allows open trade with US, Mexico, and Canada.

protectionism

Economic policy of shielding an economy from imports.

PPP

Purchasing Power Parity. Evens exchange rates between currencies. Compares goods to other countries' goods.

revaluation

an increase in the value of a currency that is set under a fixed exchange rate regime

terms of trade

the ratio at which a country can trade its exports for imports from other countries

trade balance

the value of a nation's exports minus the value of its imports; also called net exports

trade deficit

An excess of imports over exports

WTO

World Trade Organization

tariff

A tax on imported goods

world trade price

the international market price of a good or service, determined by world demand and supply

labor intensive commodities

commodities that require a relatively large amount of labor to be produced

land intensive commodities

commodities that require a relatively large amount of land to be produced