AP Econ (4?)

Unit 5 (Section 6) Terms:

• Annually Balanced Budget: A budget plan where government revenue equals expenditures every year—important for understanding fiscal policy limits.

• Budget Deficit: When government spends more than it earns, leading to borrowing—essential in understanding debt and fiscal sustainability.

• Budget Surplus: When government revenue exceeds spending, allowing for debt reduction or saving—opposite of a deficit.

• Classical Model/View: Economic theory suggesting that free markets self-regulate, emphasizing long-term growth and minimal government intervention.

• Cost-Push Inflation: Inflation caused by higher production costs (like raw materials or wages) pushing up prices—important for understanding supply shocks.

• Crowding Out Effect: When government borrowing increases interest rates, which can reduce private investment—relevant for evaluating government spending impacts.

• Cyclically Balanced Budget: Budgeting approach aiming to balance over the economic cycle rather than annually—shows flexibility in fiscal policy.

• Debt Deflation: When falling prices increase the real value of debt, leading to reduced spending and potential recessions.

• Demand-Pull Inflation: Inflation from increased overall demand in the economy, such as during economic booms.

• Discretionary Monetary Policy: Central bank actions to adjust the money supply and interest rates actively to stabilize the economy.

• Functional Finance: Theory that government should prioritize economic stability and full employment, even if it means running deficits.

• Inflation Tax: Decrease in purchasing power as inflation erodes the real value of money held.

• Infrastructure: Large-scale public works like highways and bridges that support economic activity.

• Keynesian Economics: Economic theory advocating for government spending and intervention during economic downturns to stabilize demand.

• Laffer Curve: Graph suggesting there’s an optimal tax rate to maximize revenue—used in supply-side economics.

• Liquidity Trap: Situation where low interest rates fail to encourage spending, making monetary policy less effective.

• Long-Run Phillips Curve: Shows that there’s no trade-off between inflation and unemployment in the long run, supporting the idea of the natural rate of unemployment.

• Macroeconomic Policy Activism: Active use of fiscal and monetary policy to manage economic fluctuations.

• Monetarism: Theory that changes in the money supply are the primary driver of inflation and economic performance.

• Monetary Neutrality: Belief that in the long run, changes in the money supply only affect prices, not real GDP.

• Monetary Policy Rule: A set guideline for central banks to manage interest rates, aiming for predictable and stable policies.

• Natural Rate Hypothesis: Theory that there’s a certain level of unemployment unaffected by inflationary pressures, associated with the Long-Run Phillips Curve.

• NAIRU (Nonaccelerating Inflation Rate of Unemployment): Unemployment rate where inflation remains stable—another term for the natural rate of unemployment.

• Political Business Cycle: When politicians influence economic cycles (like through spending increases) around elections to boost popularity.

• Public Debt: Total amount of government debt from borrowing to cover deficits.

• Quantity Theory of Money: Theory connecting the money supply and price level, suggesting that increased money supply leads to higher prices (inflation).

• Rational Expectations: Theory that people use all available information when making economic decisions, often offsetting policy effects.

• Real Business Cycle Theory: Theory attributing economic cycles to real factors like technological changes rather than just monetary factors.

• Short-Run Phillips Curve: Shows an inverse relationship between inflation and unemployment, suggesting a short-term trade-off.

• Supply-Side Economics: Theory that economic growth can be stimulated by reducing taxes and regulation.

• Velocity of Money: The speed at which money circulates in the economy, used in the Quantity Theory of Money.

• Zero Bound: The concept that interest rates cannot go below zero, limiting the effectiveness of monetary policy in certain situations.

Unit 5 (Section 7) Terms:

• Aggregate Production Function: Relationship showing how total output depends on inputs like labor and capital—used to analyze growth.

• Convergence Hypothesis: Suggests that poorer countries will grow faster and eventually catch up to richer ones under similar conditions.

• Depreciation: The wearing down or loss of value in physical capital over time.

• Diminishing Returns to Physical Capital: Idea that adding more capital eventually yields less additional output—explains why growth may slow.

• Economic Growth: Increase in an economy’s output, typically measured as growth in GDP.

• Growth Accounting: Technique used to estimate contributions of factors like capital, labor, and technology to economic growth.

• Human Capital: Skills and education of workers, contributing to productivity and economic growth.

• Labor Productivity: Output per worker or per hour worked—central to understanding long-term growth.

• Physical Capital: Tools, machinery, and buildings used in production.

• Research and Development (R&D): Investment in innovation and new products, crucial for technological progress.

• Rule of 70: Quick formula to estimate how long it will take for a variable to double (70 ÷ growth rate).

• Sustainable: Growth that can be maintained without depleting resources or harming the environment.

• Technology: Innovations that improve production efficiency, boosting economic growth.

• Total Factor Productivity: Measure of efficiency improvements in production not attributed to labor or capital.

Graphs:

• Phillips Curve: Graph showing the relationship between inflation and unemployment, indicating a short-run trade-off but none in the long run.