AP Macroeconomics Ultimate Guide- Semester Long

This is a compiled list of all the helpful terms that helped me prepare for regular macro tests as well as the AP exam

Physical capital

Human- made equipment such as machinery, buildings, roads, vehicles, and computers.

Economic growth

The ability to produce a larger total output over time.

Opportunity cost

The value of the next-highest-valued alternative use of that resource. 

Demand

The different quantities of goods and services that consumers are willing and able to purchase at various price levels.

Production Possibility Curve

A model used to show the tradeoffs associated with allocating resources between the production of two goods.

Macroeconomics

The part of economics concerned with large-scale economic endeavors.

Labor

Human effort and talent, physical and mental

Land or natural resources

Any resource created by nature

Market

Essentially, it is the place in the economy where buyers and sellers perform transactions

Productive efficiency

When the economy is producing the maximum output for a given level of technology and resources

Allocative efficiency

The economy is producing the optimal mix of goods and services

Market failure

When a market fails to produce the allocative efficient quantity

Law of demand

Holding all else equal, when the price of good rises, consumers decrease the quantity demanded of that good

GDP

Measures the economic growth of a country.

Market basket

A collection of goods and services used to represent what is consumed in the economy.

Recession

Unofficially defined as two consecutive quarters of falling real GDP.

Business cycles

The fluctuations in economic activity over time.

Consumers

The people who buy the goods /services in an economy.

GDP deflator

Includes all items that make up domestic products.

Circular flow of economic activity

A model that shows how households and firms circulate resources, goods, and incomes through the economy

Gross domestic product (GDP)

The market value of the final goods and services produced within a nation in a given period

GDP

C + I + G + XN

Investment spending (I)

Investment is defined as current spending to increase output or productivity later

Government spending (G)

Purchases made by the government for final goods and services and investments in infrastructure

Aggregate income (AI)

The sum of all income-Wages + Rent + Interest + Profit-earned by suppliers of resources in the economy

Unemployed

A person is unemployed if they are not currently working but are actively seeking work

Labor force

The sum of all individuals 16 years and older who are either currently employed (E) or unemployed (U)

People not considered to be in the labor force are…

A person is classified as out of the labor force if they have chosen to not seek employment

Unemployment rate

The percentage of the labor force that falls into the unemployed category

Discouraged workers

Citizens who have been without work for so long that they become tired of looking for work and drop out of the labor force

Frictional unemployment

A type of unemployment that occurs when someone new enters the labor market or switches jobs

Structural unemployment

A type of unemployment that is the result of fundamental, underlying changes in the economy such that some job skills are no longer in demand

Cyclical unemployment

A type of unemployment that rises and falls within the business cycle (recession)

Full employment

Exists when the economy is experiencing no cyclical unemployment

Natural rate of unemployment (NRU)

The unemployment rate associated with full employment, somewhere between 4 to 6 percent in the United States

Consumer price index (CPI)

The price index that measures the average price level of the items in the base year market basket

Deflation

the general decrease in prices

Inflation

the general increase in prices

Disinflation

a decrease in the rate of inflation

Inflation rate

the percentage change in aggregate price level across an entire economy in a year

Nominal GDP

The value of current production at the current prices

Real GDP

The value of current production but using prices from a fixed point in time

Base year

The year that serves as a reference point for constructing a price index and comparing real values over time

Price index

A measure of the average level of prices in a market basket for a given year, when compared to the prices in a reference (or base) year

Expansion

A period where real GDP is growing

Peak

The top of a business cycle where an expansion has ended

Contraction

A period where real GDP is falling

Recession

Unofficially defined as two consecutive quarters of falling real GDP

Depression

A prolonged, deep contraction in the business cycle

Trough

The bottom of the cycle where a contraction has stopped

Macroeconomic equilibrium

When the quantity of real output demanded is equal to the quantity of real output supplied.

Marginal propensity to Consume (MPC)

Shows how much people consume rather than save when there is a change in income.

Supply shocks

Affects the costs of firms and the position of the SRAS curve, either positively or negatively.

Multiplier effect

The idea that an initial change in spending will set off a spending chain that is magnified in the economy.

Recessionary gap

The amount by which full- employment GDP exceeds equilibrium GDP.

Fiscal policy

Deliberate changes in government spending and net tax collection affect economic output, unemployment, and the price level.

Contractionary fiscal policy

When the economy operates beyond full employement, inflation becomes a problem, so the government might need to contract the economy.

Expansionary fiscal policy

The increases in government spending or lower net taxes meant to shift AD to the right.

AD curve

When the AD increases, an inflationary gap happens to cause an increase in real GDP to GDPi (lower unemployment rate) and an increase in the aggregate price level to PL2.

Income taxes

An example of an automatic stabilizer during an economic boom or recession.

Inflationary gap

The amount by which equilibrium GDP exceeds full employment GDP.

Aggregate demand

The inverse relationship between all spending on domestic output and the aggregate price level of that output.

Marginal propensity to save (MPS)

Shows how much people save rather than consume when there is a change in income.

Fiscal policy

Designed to manipulate AD to "fix "the economy.

Monetary base

currency in circulation and bank reserves.

Stock

A certificate that represents a claim to, or share of the ownership of a firm

Fiat Money

The paper and coin money used today

Unit of account

Units of currency measure the relative worth of goods and services

Store of value

Money is a relatively good way to store value, when theres no inflation because it keeps its value

Money supply

The quantity of money in circulation as measured by the Federal Reserve (the Fed) as M1 and M2

Liquidity

A measure of how easily an asset can be converted to cash

Reserve Ratio

The fraction of a banks total deposits that are kept on reserve

Reserve requirement

Regulation set by the Fed that states the minimum reserve ratio for banks

Phillips Curve

A graphical device that shows the relationship between inflation and the unemployment rate.

Surplus

When the difference between tax revenues and government spending is positive.

Stagflation

A situation where inflation and the unemployment rate are both increasing.

Crowding out effect

It is the economic theory that public sector spending can lessen or eliminate private sector spending

FOREX Market

When the quantity supplied of the currency equals the quantity demanded of the currency at a specific exchange rate.

Capital (or financial) account

This account shows the flow of investment on real or financial assets between a nation and foreigners

Official reserves account

The Feds adjustment of a deficit or surplus in the current and capital account by the addition or subtraction of foreign currencies so that the balance of payments is zero

Balance of payments deficit

When the US has sent more dollars out than foreign currency has come in while adding the current and capital account

Balance of payment surplus

When more foreign currency was coming into the US than American dollars sent abroad

Exchange rate

The price of one currency in terms of a second currency