Monster Vocabulary AP Macroeconomics [Eventually All Units] (ABNER)

Aggregate Demand (AD)

Total demand for all goods/services in an economy at a given price level

Short-run Aggregate Supply (SRAS)

total goods/services firms produce in the short run

Long-run Aggregate Supply (LRAS)

the productive potential of economy operating at full capacity

AD = C + I + G +(X-M)

consumer spending + investment + gov spending + (exports-imports)

Demand-Pull Inflation

prices rise because AD exceeds SRAS

Cost-Push Inflation

Prices rise due to higher production costs, shifting SRAS left

National Income

Total earnings from all resources in an economy

Scenario A

economy is in a recession (output recessionary gap)

Scenario B

SRAS, LRAS, and AD intersect (full-employment)

Scenario C

too much AD so economy is overheating (inflationary gap)

Full-Employment Equilibrium

Economy produces at LRAS

Output Gap

actual GDP is below potential GDP

Inflationary Gap

Actual GDP is greater than Potential GDP

Recessionary Gap

Actual GDP is less than Potential GDP

Long-Run Equilibrium

the process of entry or exit is complete - remaining firms earn zero economic profit

U > NRU

Unemployment exceeds the natural rate

U = NRU

Economy at full employment

U < NRU

Unemployment below natural rate

Tax Multiplier

-MPC/(1−MPC) → effect of tax changes on GDP

Spending Multiplier

1/(1−MPC) - effect of spending on GDP

Balanced Budget Multiplier

the factor by which a change in both spending and taxes changes real GDP

Multiplier Effect

Initial spending trades hands with many people, leads to larger total GDP change

Marginal Propensity to Save (MPS)

(MPS) Fraction saved (MPS=1-MPC)

Marginal Propensity to Consume (MPC)

Fraction of extra income spent

Fiscal Policy

Gov uses spending to influence AD

Neoclassical Economic Theory

Laissez-faire focus on long-run supply-side growth

Keynesian Economic Theory

Focuses on short-run demand-side fixes

Long-Run "self-adjustment"

Economy returns to LRAS over time without government intervention b/c of lower wage expectations

Automatic Stabilizers

Policies that counter recessions/inflation without new laws

SRAS "Shifters"

Input costs, supply shocks, government regulations

AD "Shifters"

Changes in C, I, G, (X-M) (e.g., consumer confidence, interest rates, government spending)

Output (Y)

The amount of goods/services produced in the economy

Actual Output (Y) versus Potential Output (Yf)

Y is Real GDP produced, Yf is Max GDP at full employment

Inventories

Unsold supplies for businesses

Financial Asset

Claim on future income

Bonds

Loans to governments/corporations that pay interest

Liquidity

Ease of converting assets to cash

Nominal Interest Rate (NIR)

The cost of a loan that does not account for inflation

Real Interest Rate (RIR)

(Nominal rate - inflation rate) for interest

Monetary Base (M0)

Physical currency + bank reserves

Money Supply (M1)

Cash + checkable deposits

Money Demand

The sum of the transaction demand and the asset demand for money; inversely related to NIR

Required Reserves

Cash banks must hold (set by Fed)

Excess Reserves

Extra cash banks can lend

Assets vs. Liabilities

Assets: Tangible and intangible property under the bank's control and/or possession

Liabilities: Others' legal claims on bank assets

Reserve Ratio

Required reserves/total deposits

Money Multiplier

1/Reserve Ratio1/Reserve Ratio → max money banks can create from $1 deposit (Do not confuse this with Multiplier Effect)

The Federal Reserve

Central bank managing U.S money supply

Monetary Policy

Fed adjusts interest rates via the money supply or via administered rates to stabilize AD

Discount Rate

Interest rate Fed charges banks for loans from the Fed

Open Market Operations (OMO)

Fed buying or selling bonds from/to banks to impact NIR

Reserve Requirement

% of deposits banks must hold

The Money Market

Where Fed influences short-term interest rates (via supply/demand for money)

The Loanable Funds Market

Where savers supply funds and borrowers demand loans (determines real interest rates)

Limited Reserves Framework

Fed targets NIR via money supply -> ex: RR [Reserve requirement], OMO, DR [Discount rate] (pre-2008)

Ample Reserves Framework

Fed uses IOR to control rates (post-2008)

Administered Rates

Interest rates set directly by the Fed

Interest on Reserves (IOR)

Rate Fed pays banks to hold reserves

Liquidity Preference

A general tendency for investors to prefer short-term (that is, more liquid) securities

Expansionary Fiscal Policy

↑ Gov spending or ↓ taxes = ↑ AD (right shift)

Contractionary Fiscal Policy

↓ Gov spending or ↑ taxes = ↓ AD (left shift)

Expansionary Monetary Policy

Central bank ↑ money supply (buy bonds, ↓ rates) → ↓ interest rates = ↑ AD

Contractionary Monetary Policy

Central bank ↓ money supply (sell bonds, ↑ rates) → ↑ interest rates = ↓ AD

Fed Funds Rate

Rate banks charge each other for overnight loans

Policy Rate

Central bank's benchmark rate to steer economy

Money Supply "Shifters"

OMO (buy/sell bonds); reserve ratio rate changes; discount rate changes

Money Demand "Shifters"

National Income (Y): ↑Income → ↑Money demand (more spending).

Price Level (PL): ↑Prices → ↑Money demand (more $ needed for transactions).

Interest Rates: ↑Interest Rates → ↓Money demand (higher opportunity cost of holding cash).

Demand Deposits

Checking accounts

Process of Money Supply Expansion (Via Deposits)

Deposit = bank keeps reserves → lends excess → gets spent → redeposit → repeat

Total money = Initial deposit × money multiplier (1/ required reserve ratio)