macro ap test review

frictional

short term unemployment, between jobs, searching for job

structural

long term unemployment, jobs changed

cyclical

recession

unemployment rate

unemployed/CLF (civilian labor force)

participation rate

CLF/population

natural rate of unemployment

4%-6%

medium of exchange

money can buy things

unit of account

money can measure value of things

store of money

keep money

money supply (M1)

cash and demand deposits

fractional reserve system

allows banks to loan out all but a small fraction of their demand deposits

quantity theory of money

M x V = P x Y

rational expectations theory

fully anticipated fiscal or monetary policies will have no effect on the economy

gross domestic product (GDP)

the dollar value of all final goods and services produced in this country during the current year

GDP = national output = national income

GDP added from 2 ways

the expenditure (spending) approach- C + I + G + Xn (consumption + investment + gov spending + net exports)

the income approach - W + R + I + P (wages + rent + interest + profits)

nominal GDP

current output x current prices

real GDP

current output x base year prices

GDP deflator (D)

R = 100N/D real GDP = 100 x nominal GDP / deflator

growth rate (N-O/O)

new gdp - old gdp / old gdp

unemployment rate and real gdp are

inversely related

non civilian labor force

retired, jail, students, discouraged

demand-pull inflation

aggregate demand increases

cost-push inflation (stagflation, supply shock)

aggregate supply decreases

over expansion of currency

hyperinflation

disposable income

disposable income = C + S

real gdp equation

real gdp = nominal gdp / price index

price index equation

price index in a given year = price of market basket in specific year / price of same market basket in base year

x 100 at end

nominal income

the number of dollars earned as rent, wages, interest or profit

real income

measures the amount of goods and services nominal income can buy

nominal rate

real interest rate + expected rate of inflation

real interest rate

nominal rate - expected rate of inflation

loanable funds market (real interest rate)

demand = borrowers (business for investment, consumer for spending, government for deficit spending)

supply = savers

money market

supply of money is vertical and controlled by the fed

demand is for money that is held

marginal propensity to consume

change in consumption / change in national income

keynesian spending multiplier

1 / 1 - MPC or 1 / MPS

recession on a graph

equilibrium is to the left of the LRAS curve

inflation on a graph

equilibrium is to the right of the LRAS curve

high interest rates

business borrow (invest) less, consumers put money in banks to get higher rate of return, price level decreases

low interest rates

businesses would invest more, consumers take money out of banks, price level increases

philips curve

a negative relationship between the inflation rate and unemployment

money multiplier

1 / required reserve ratio

fed buys bonds

money supply increases

fed sells bonds

money supply decreases

japanese wants more u.s. goods

japans demand for u.s dollars increases, the u.s supply for dollars would increase

the u.s dollar would appreciate, the yen depreciates

classical theory in a recession thinks

workers would accept lower wages, production costs to lower, and aggregate supply would shift to the right

classical theory in high inflation thinks

workers demand higher wages, production costs to increase, and the aggregate supply would shift to the left

keynesians believe

wages are sticky and want to use counter cyclical fiscal policy to shift the aggregate demand curve by either inc/dec government spending and/or inc/dec income taxes

crowding out

when the government is in a deficit, it forces them to borrow more, causing real interest rates to go up, making it harder for firms to invest in the future

short run philips curve

always opposite of the aggregate supply curve

long run growth

the economy is capable of producing more in the future and shown from: the ppc curve shifting out, the LRAS shifts right, the long run philips curve shifts left