AP Macroecon

macroeconomics

the branch of economics that studies the overall working of a national economy

aggregate output

The total quantity of goods and services produced in an economy in a given period.

income

the financial gain (earned or unearned) accruing over a given period of time

aggregate demand

total demand for goods and services in an economy

aggregate supply

total supply of goods and services in an economy

sticky prices

Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded.

great depression

the economic crisis beginning with the stock market crash in 1929 and continuing through the 1930s

John Maynard Keynes

English economist who advocated the use of government monetary and fiscal policy to maintain full employment without inflation (1883-1946)

inflation

a general and progressive increase in prices

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

cost push inflation

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

hyperinflation

severe and prolonged inflation that results in the value of money losing its acceptability as a medium of exchange

deflation

a contraction of economic activity resulting in a decline of prices

stagflation

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

recession

the state of the economy declines

business cycle

recurring fluctuations in economic activity consisting of recession and recovery and growth and decline

expansion

a period of economic growth as measured by a rise in real GDP

contraction

a period of economic decline marked by falling real GDP

depression

a long-term economic state characterized by unemployment and low prices and low levels of trade and investment

unemployment rate

the percentage of the work force that is unemployed at any given date

fiscal policy

a government policy for dealing with the budget (especially with taxation and borrowing)

monetary policy

policy that involves changing the rate of growth of the money supply in circulation in order to affect the cost and availability of credit

supply side policies

Government policies that focus on stimulating aggregate supply instead of aggregate demand.

transfer payments

Cash payments made by the government to people who do not supply goods, services, or labor in exchange for these payments. They include Social Security benefits, veterans' benefits, and welfare payments.

GDP

Gross Domestic Product- the total market value of all final goods and services produced annually in an economy

GNP

Gross National Product - the sum of all goods and services produced in a nation in a year

final goods

Goods and services that have been purchased for final use and not for resale or further processing or manufacturing

consumption

The utilization of economic goods to satisfy needs or in manufacturing

durable goods

items with lasting value, the purchase of which is considered a form of savings

nondurable goods

goods that lasts a short period, such as food, light bulbs, and sneakers

services

performance of duties or provision of space and equipment helpful to others

planned investment

the amount that firms plan or intend to invest

government purchases

spending on goods and services by local, state, and federal governments

net exports

exports minus imports

indirect taxes

Taxes such as sales, excies, and property taxes as well as taxes that are part of a firm's cost of producing a product, these are usually passed on to the consumer

subsidies

a grant or contribution of money, especially one made by a government

net factor payments

These are the payments received by domestic factors of production from abroad minus the payments to foreign factors of production from domestic sources.

net national product

A measure of all goods and services produced by a country in a year, including production from its investments abroad, minus the loss or degradation of natural resource capital as a result of productivity.

personal saving rate

the percentage of disposable personal income that is saved

nominal GDP

the GDP measured in terms of the price level at the time of measurement (unadjusted for inflation)

underground economy

buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal

gross national income

The total value of goods and services produced by a country per year plus net income earned abroad by its nationals; formerly called "gross national product."

frictional unemployment

unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills

structural unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

natural rate of unemployment

The "normal" unemployment rate due to frictional and structural conditions in labor markets. It is the unemployment rate that occurs when the economy is operating at a sustainable rate of output

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves

CPI

an index of the cost of all goods and services to a typical consumer

producer price index

a measure of the cost of a basket of goods and services bought by firms

real interest rate

the interest rate corrected for the effects of inflation

savings

money set aside, generally in a bank or investments

consumption function

The relationship between consumption and income.

marginal propensity to consume

MPC \= Marginal Propensity to Consume - the ratio of the change in consumption spending to a given change in income. MPC \= change in C/change in Y

marginal propensity to save

the change in one's savings caused by the change in one's income. change in savings (S)/change in income (Y)

planned aggregate expenditure

the total amount the economy plans to spend in a given period. It is equal to Consumption (C) plus Planned Investment (I) AE\= C+I

money multiplier

The multiple by which deposits can increase for every dollar increase in reserves; equal to 1 divided by the required reserve ratio

paradox of thrift

A Keynesian concept explaining why consumers will not help the economy get out of a recession

net taxes

The amount remaining after costs of goods sold and operating expenses are subtracted from sales

disposable income

income (after taxes) that is available to you for saving or spending

budget deficit

an excess of expenditures over revenues

leakages and injections

exceptions in the circular flow of income.

government spending multiplier

the ratio of the change in the equilibrium level of output to a change in government spending (1/MPS)

tax multiplier

The ratio of change in the equilibrium level of output to a change in taxes

balanced budget multiplier

Gives the change in equilibrium output that results from 1-unit increase or decrease in both taxes and government spending.

federal debt

all the money borrowed by the federal government over the years and still outstanding

automatic stabilizers

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action

fiscal drag

The negative effect on the economy that occurs when average tax rates increase because taxpayers have moved into higher income brackets during an expansion.

structural deficit

the deficit that remains at full employment

cyclical deficit

the deficit that occurs because of a downturn in the business cycle.

commodity money

objects that have value in themselves and that are also used as money

fiat money

money that has value because the government has ordered that it is an acceptable

currency debasement

the decrease in the value of money that occurs when its supply is increased rapidly

M1

narrowest measure of the money supply that includes all coins and paper bills in circulation, traveler's checks, checking account balances, and balances in credit unions

M2

All of M1 + less immediate (liquid) forms of money to include savings, money market mutual funds, and small denomination time deposits.

required reserves ratio

Percentage of deposits that the fed requires a bank to hold in vault cash or on deposit with the Fed.

FOMC

The Federal Open Market Committee is the most powerful committee of the FED, because it makes the decisions that affect the economy as a whole by manipulating the money supply.

discount rate

the rate of interest set by the Federal Reserve that member banks are charged when they borrow money through the Federal Reserve System

tight money

the economic condition in which credit is difficult to secure and interest rates are high

easy money

the economic condition in which credit is easy to secure

expansionary policies

fiscal policies, like higher spending and tax cuts, that encourage economic growth

crowding out effect

the loss of funds for private investment caused by government borrowing

contractionary policy

a fiscal policy used to reduce economic growth, often through decreased spending or higher taxes

aggregate demand

the amount of goods and services in the economy that will be purchased at all possible price levels

aggregate supply

the total amount of goods and services in the economy available at all possible price levels

cost shock

a change in costs that shifts the short-run aggregate supply curve

supply shock

An unexpected event that causes the short-run aggregate supply curve to shift

sticky wages

occur when workers are unable to change their nominal wage rate easily in response to changing overall prices

COLA

cost of living adjustment

efficiency wage theory

A theory stating that wages influence worker productivity

Phillip's curve

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

bond

a certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation in order to raise money

stock

a certificate documenting the shareholder's ownership in the corporation

average propensity to consume

fraction or % of disposable income that households plan to spend for consumer goods and services; consumption divided by disposable income

nominal wage rate

The wage rate in current dollars.

real wage rate

wage rate adjusted for inflation

productivity

the ratio of the quantity and quality of units produced to the labor per unit of time

Okun's Law

This details the inverse relationship between unemployment and real GDP.

economic growth

steady growth in the productive capacity of the economy (and so a growth of national income)

aggregate production function

a function describing the relationship between the quantity of inputs used in a country and the quantity of output produced in a country

velocity of money

the rate at which money changes hands

quantity theory of money

a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate