AP Econ Unit 1+2+3+4+5+6

Mr. Lee Class

Financial Sector

Network of institutions that link borrowers and lenders

Asset

Anything tangible or intangible that has value

Interest rate

Amount a lender charges a borrower for borrowing money

Interest-bearing asset

Asset that earned interest over time like bonds

Liquidity

Ease with which an asset can be converted into a medium of exchange/money

Bonds

Loans or IOUs that represent debt by governments, businesses or individuals that must be repaid to the lender

Stocks

Represent ownership of a corporation and the owner is often entitled to a portion of the profit paid out as dividends

Real interest rate

Percentage increase in purchasing power that a borrower pays that is adjusted for inflation

Nominal interest rate

Percentage increase in money that the borrower pays that is not adjusted for inflation

Present value

Current worth of some future amount of money

Money

Anything generally accepted as payment for goods and services

Wealth

Total collection of assets

Income

Flow of earnings per unit of time

Commodity money

Something that performs the function of money and has intrinsic value like gold or cigarettes

Fiat money

Something that serves as money but has no other value or use like paper money

Purchasing power

The amount of goods and services a unit of money can buy

Fractional reserve banking

Bank holds a portion of deposits for withdrawals and loans out the rest

Demand deposits

Money deposited in a commercial bank

Required reserves

Percent that banks must hold by law

Excess reserves

 Amount that the bank can loan out

Balance sheet

A record of a bank's assets, liabilities, and net worth

Transaction demand for money

People hold money for everyday transactions

Asset demand for money

People hold money since it is less risky than other assets

Federal Reserve System/Board or The Fed

Nonpartisan government office that adjusts the money supply to influence the economy

Discount rate

The interest rate that the Fed charges commercial banks

Open market operations

When the Fed buys or sells government bonds to affect money supply

Federal funds rate

Interest rate that banks charge one another for one-day loans of reserves

Loanable funds market

Shows supply and demand of loans and the equilibrium real interest rate

Private saving

Amount that households save instead of consume

Public saving

Amount that the government saves instead of spends

National saving

Public saving + private saving

Capital inflow

Amount of money entering the country

Capital outflow

Amount of money leaving the country

Net capital inflow

Capital inflow - capital outflow

Private investment

Borrowing by businesses and consumers

Government investment

Deficit spending when government spending is greater than tax revenue

nominal interest rate - expected inflation

Real interest rate =

real interest rate + expected inflation

Nominal interest rate =

$X/(1 + ir)^n

Present value of $X in 1 year =

$X(1 + ir)^n

 Future value of $X in N years =

1/Reserve requirement (ratio)

Money multiplier =

Aggregate

Added all together

Aggregate demand AD

All the goods and services that buyers ware willing and able to purchase at different price levels, real GDP

Wealth effect/Real balance effect

Higher price levels reduce the purchasing power of money and decreases quantity of expenditures and vice versa

Interest rate effect

For price level increases, lenders need to charge higher interest rate to get a real return on loans, high interest rates discourage consumers and investing

Foreign trade effect

 When your price level rises, exports falls and imports rise causing real GDP

Multiplier effect

Initial change in spending will set off a magnified, spending chain

Marginal Propensity to Consume MPC

How much people consumer rather than save when there is a change in disposable income, expressed as a fraction/decimal

Marginal Propensity to Save MPS

How much people save rather than consume when there is a change in disposable income, expressed as a fraction/decimal

Aggregate Supply AS

Amount of goods and services (real GDP) that firms will produce in an economy at different price levels

Short-run aggregate supply SRAS

Wages & resources prices are sticky & won't change as price level changes

Long-run aggregate supply LRAS

Wages & resource prices are flexible & will change as price level changes

Stagflation

Stagnant economy + inflation causes a recessionary gap

Demand-pull inflation

Demand pulls up prices and causes aggregate demand to increase

Cost-push inflation

Higher production costs increase prices causing SRAS to decrease

Autonomous consumption

Amount consumers will spend regardless of income to pay for necessities

Disposable income

Income after taxes

Dissaving

Negative savings

Fiscal policy

Actions by Congress to stabilize the economy

Monetary policy

Actions by the Federal Reserve Bank to stabilize the economy

Discretionary fiscal policy

New bill to change AD through government spending or taxation but lags

Non-discretionary fiscal policy/automatic stabilizers

Permanent spending or taxation laws to work counter cyclically to stabilize the economy

Contractionary fiscal policy

Laws that reduce inflation and decrease GDP by decreasing government spending and increases taxes to close an inflationary gap

Expansionary fiscal policy

Laws that reduce unemployment and increase GDP by increasing government spending and decreasing taxes to close a recessionary gap

Inflationary gap/positive output

Above or beyond full employment

Recessionary gap/negative output gap

Below or less than full employment

change in Consumer spending + change in Investment spending + change in Government spending + change in Net Exports (X-m)

Shifter of Aggregate Demand =

AD = GDP = C + | + G + Xn =

Change in Consumption/Change in disposable income

Marginal Propensity to Consume MPC =

Change in Savings/Change in disposable income

Marginal Propensity to Save MPS =

1 - MPC

MPS =

1/MPS or 1/(1-MPC)

Spending Multiplier =

Spending Multiplier x Initial change in Spending

Total Change in GDP =

MPC x (1/MPS) or MPC/MPS

Simple Tax Multiplier =

Tax Multiplier x Initial change in Taxes

Total Change in GDP =

change in Resource prices + change in Actions of the government + change in Productivity

 Shifters of Aggregate Supply = AS = R+ A + P

Private sector

Part of the economy run by individuals and businesses

Public sector

Part of the economy that is controlled by the government

Factor payments

Payment for the factors of production like rent, wages, interest, and profit

Transfer payments

When the government redistributes income like welfare or social welfare

Subsidies

Government payments to businesses to increase supply

Gross domestic product (GDP)

Dollar value of all final new goods and services produced within a country in one year

GDP per capita

GDP divided by population/per person

Intermediate goods

Goods inside final goods that don't count towards GDP

Durable goods

Goods that don't wear out quickly and last over a long period of time

Nondurable goods

Goods that have a short life cycle

Unemployment

Workers that are actively looking for a job but aren't working

Frictional unemployment

Unemployment that is temporary or being between jobs and the person has transferable skills

Seasonal unemployment

Unemployment based on time of year or nature of the job

Structural unemployment

Changes in the labor force that make some skills obsolete

Technological unemployment

Unemployment where automation and machinery replace workers

Cyclical unemployment

Unemployment caused by recession

Natural rate of unemployment (NRU)

Amount of unemployment that exists when the economy is healthy and growing, focuses on output and not having too much unemployment

Non-Accelerating Inflation Rate of Unemployment (NAIRU)

Focuses on inflation and not having too little unemployment

Discouraged workers

Some people are no longer looking for a job because they have given up

Underemployed workers

Someone who wants more hours and can't get them but are still considered employed

Inflation

Rising general level of prices and reduces purchasing power of money

Deflation

Decrease in general prices and causes people to hoard money

Disinflation

Prices increasing at slower rates

Nominal wage

 Wage measured by dollars rather than purchasing power

Real wage

Wage adjusted for inflation