AP macro

Topic 5.1 – Fiscal and Monetary Policy Actions in the Short-Run
• Fiscal Policy: the use of government purchases of goods and services, government transfers, or
tax policy to stabilize the economy
• Monetary Policy: actions of a central bank used to stabilize the economy by influencing
aggregate demand through changing interest rates
Topic 5.2 – The Phillips Curve
• Short-Run Phillips Curve: represents the negative short-run relationship between the
unemployment rate and the inflation rate
• Long-Run Phillips Curve: shows the relationship between unemployment and inflation after
expectations of inflation have has time to adjust to experience
Topic 5.3 – Money Growth and Inflation
• Quantity Theory of Money: emphasizes the positive relationship between the price level and the
money supply. It relies on the equation (M x V = P x Y)
• Velocity of Money: the ratio of nominal GDP to the money supply. It is a measure of the number
of times the average dollar bill is spent per year.
Topic 5.4 – Government Deficits and the National Debt
• Budget Surplus: exists when tax revenues exceed government spending on goods, services, and
transfer payments
• Budget Deficit: exists when government spending on goods, services, and transfer payments
exceeds tax revenue
• Government Debt: the accumulation of past budget deficits, minus the past budget surpluses
• Debt to GDP ratio: the government’s debt as a percentage of GDP
Topic 5.5 – Crowding Out
• Crowding Out: occurs when a government deficit drives up the interest rate and leads to
reduced investment spending
Topic 5.6 – Economic Growth
• Labor Productivity: overall output per worker
• Physical Capital: consists of human-made goods such as buildings and machines used to produce
other goods and services

AP Macroeconomics
Unit 5 Vocabulary
• Human Capital: the improvement in labor created by the education and knowledge of members
of the workforce
• Technology: the technical means for the production of goods and services
• Aggregate Production Function: a function that shows how aggregate output depends on the
stock of physical capital and the quantity and quality of labor resources, as well as the state of
technology
• Diminishing Returns to Physical Capital: exists when holding the quantity and quality of labor
and technology fixed, each successive increase in the amount of physical capital leads to a
smaller increase in productivity
• Depreciation: occurs when the value of a physical asset is reduced by wear, age, or obsolescence
Topic 5.7 – Public Policy and Economic Growth
• Infrastructure: Roads, power lines, ports, information networks, and other underpinnings for
economic activity
• Supply-Side Fiscal Policies: government policies that seek to promote economic growth by
affecting short-run and long-run aggregate supply
• Incentive: a reward or punishment that motivates particular choices. In supply-side policy, there
are motivation for households and businesses to work, save, and invest