AP macroeconomics

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absolute advantage
the ability to produce something more efficiently
productive equipment or machinery
comparative advantage
the ability to produce something with a lower opportunity cost
a social science that studies how resources are used and is often concerned with how resources can be used to their fullest potential
using resources to their maximum potential
all human activity that is productive
all natural resources
law of Increasing costs
law that states that when more of a product is initially being produced, the higher the opportunity cost will be to produce still more
economic problems encountered by the nation as a whole
economic problems faced by individual units within the overall company
opportunity cost
the amount of one good that must be sacrificed to obtain an alternative good
positive economics
economic analysis that draws conclusions based on logical deduction or induction (value judgements are avoided)
production possibilities frontier
the combinations of two goods that can be produced if the economy uses all of its resources fully and efficiently
normative economies
economies involving value judgement
anything that can be used to produce a good or service
allocative efficiency
term for resources being deployed to produce just the right amount of each product to satisfy society’s wants
an economic system where supply and demand determine prices
circular flow diagram
diagram that shows how households and firms are related by the exchange of resources and products
command economy
economy in which the central government dictates what will or will not be produced and who gets what
the law of demand
law that states that when the price of a product increases, the quantity demanded decreases, ceteris paribus
law of supply
law that states that when the price of a product increases, the quantity supplied increases, ceterus paribus
mixed economy
a blend of government commands and capitalism
consumption expenditures
all the goods and services sold to households
disposable personal income (DPI)
the income of households after taxes have been paid
government expenditures
goods and services sold to governments
gross domestic product (GDP)
dollar value of production within a nation’s borders
gross national product (GNP)
dollar value of production by a country’s citizens
intermediate sales
sales to firms that will incorporate the item into their final product
investment sales
sales to firms that will incorporate the item into their final product
investment expenditures
expenditures by businesses on plants and equipment plus the change in business inventories
national income (NI)
the income earned by households and profits earned by firms after subtracting depreciation and indirect business taxes
national income and product accounts (NIPA)
a comprehensive group of statistics that measures various aspects of the economy’s performance
net exports
exports minus imports
personal income (PI)
income received by households
real GDP
GDP adjusted for the price changes
underground economy
all the illegal production of goods and services and legal production that does not pass through markets
GDP per capita
consumer price index (CPI)
measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services
cyclical unemployment
loss of jobs by individuals during a recession and the corresponding slowdown in production
fisher’s hypothesis
Nominal Interest Rate= Real Interest Rate + Expected Inflation
frictional unemployment
state of being out of work because the person is in between jobs
GDP deflator
measure of the level of prices in the economy
hidden unemployment
describing those who are able to work but who are not actively seeking employment because they are discouraged about their prospects for finding employment
a sustained rise in most prices in the economy
menu cost
the misallocation of resources because of inflation
nonaccelerating inflation rate of unemployment
the full employment rate of unemployment; when employment falls below this rate, inflation accelerates
seasonal unemployment
state of being out of work because of the time of year
structural unemployment
state of being out of work because the economy is structured, or set up, to a person’s disadvantage
unemployment rate
the number of unemployed persons divided by the labor force
(Total Cost this Period/Total Cost Base Period) x 100
Inflation rate
[(this period CPI-previous period CPI)/previous period CPI] x 100
GDP deflator
(GDP/Real GPD) x 100
Real GDP
(GDP/GDP deflator) x 100
Nominal Interest Rate
Real Interest Rate + Expected Inflation
Unemployment Rate
Number of unemployed/civilian labor force
aggregate demand
the demand for all goods and services by all households, business, governments, and foreigners
aggregate supply
the supply of all goods and services by all producers in the economy
break-even point
point where the consumption function crosses the 45 degree line and income equals spending so that saving is zero
business cycle
a wave of economic activity comprised of an expansion and a recession
classical economic theory
the predominant paradigm in economic analysis from about 1800 until 1930, based on Say’s Law
consumption theory
the relationship between consumer spending and income
equilibrium price level
the price level that equates aggregate supply and aggregate demand, the average level of prices in the economy
equilibrium quantity
the amount of output that results in no shortage or surplus, the amount of goods and service bought and sold in the economy
a sustained improvement in economic activity
Keynesian theory
theory that opposes Classical theory by emphasizing the short run and focusing on economies that are operating below full capacity
marginal propensity to consume (MPC)
idea that given an extra dollar, how much is spent?
an initial change in spending in the economy that will have a magnified, or multiplied, effect on income
a sustained decline in economic activity
Say’s Law
theory that supply creates its own demand
change in spending / change in income
total change in income
Initial Change in Spending x Multiplier
automatic stabilizers
government policies already in place that promote deficit spending during recessions and surplus budgets during expansions
crowding out
the increase in interest rates and subsequent decline in spending that occurs when the government borrows money to finance a deficit
situation that exists when government spending exceeds tax revenues
fiscal policy
changes in government spending and taxes to fight recessions or inflations
inflationary gap
what occurs when the equilibrium quantity of output is above potential output
Phillips tradeoff
the inverse relationship between inflation and unemployment
rational expectations
the idea that households and businesses will use all the information available to them when making economic decision
recessionary gap
what occurs when the equilibrium quantity of output is below potential output
term used to describe the situation when the economy experiences inflation and a recession simultaneously
spending by the government that is less than tax revenues
change in real GDP
Initial Change in Spending x Multiplier
certificate of deposit
debt instrument that is similar to a savings account except the interest rate is slightly greater and the deposit cannot be drawn on without penalty
coins and paper money
discount rate
the rate of interest the FED charges when it makes loans to depository institutions
excess reserves
the amount of any deposit that does not have to be held aside and may be used to make loans and buy investments
federal reserves
the central bank of the United The United States
fiat money
money that is not backed by any precious commodity
government securities
IOUs that the government issues when it borrows money
the ability to turn an asset into cash rapidly and without loss
currency, transaction accounts, and travelers’ checks
M1 plus savings accounts, certificates of deposit, and other liquid assets
anything that society generally accepts in payment for a good or service
money multiplier
1/reserve requirement, the multiple by which the money supply will change because of a change in bank reserves
open market operations
activities in which the FED buys and sells government securities in the secondary market
required reserves
the amount of any deposit that must be held aside and not used to make loans or buy investment
reserve requirement
the percentage of any deposit that must be held aside and not used to amke loans or buy investments
savings account
an account at a depository institution that earns interest while the funds are readily available but cannot be withdrawn with checks
secondary market
place where government securities that have already been issued may be bought or sold
transaction account
a checking account at a bank or a similar account at some other depository institution
money multiplier
1/ Reserve Requirement
change in money supply
Money Multiplier x Change in Bank Reserves
board of governors
executive board of the FED that makes major monetary policy decisions
demand management policy
monetary and fiscal policy
equation of exchange
M x V = P x Q; the money supply times its velocity equals the price level times output
federal open market committee (FOMC)
a committee within the FED that designs and executes the particular of monetary policy
one who believes that changes in the money supply have a profound effect on the economy
monetary neutrality
policy in which a change in the money supply would result in a proportional change in prices while real variables, such as the unemployment rate, would be unaffected
monetary policy
changes in the money supply to fight recessions or inflations
money demand
the amount that households and firms want to hold in currency and deposits
velocity of money
describing the number of times the typical dollar of M1 or M2 is used to make purchases during a year
equation of exchange
M x V = P x Q
capital productivity
the amount of output per unit of plant and equipment
economic growth
growth of output usually measured by the percentage change in real GDP or real GDP per capita
human capital
the skill and knowledge embodied in the labor force
labor productivity
the amount of output per unit of labor
potential GDP
the amount that can be produced using resources fully and efficiently
output per unit of input
total productivity
the amount of all inputs
Rule of 70
years it takes a variable to double =70/the annual growth rate of the variable
the increase of the value of a currency in terms of another currency
balance of payments
an accounting of the funds that flow in and out of a country comprised of the capital account and the current account
balance of trade
a nation’s exports minus its imports
capital account
a portion of the balance of payments comprised of foreign purchases of US assets minus US purchases of foreign assets, plus the change in official reserves
closed economy
a hypothetical economy with no foreign trade
current account
a portion of the balance of payments comprised of the trade balance, net investment income, and net transfers
the decrease of the value of a currency in terms of another currency
the practice or foreign producers selling a product in the domestic market for less than it cost to produce it
exchange rate
the value of one country’s currency in terms of another’s
gold standard
a unit of one currency that is equivalent to a stated amount of gold
import quota
a limit on the amount of a product that can be imported
import tariff
a tax on a specified import product
infant industries
those industries that are just getting started, perhaps requiring trade restrictions
situation in which a nation or group of nations uses their official reserves to supply or demand a currency in order to alter the exchange rate
managed float
an exchange rate regime where supply and demand determine exchange rates with occasional intervention when warranted
net investment income
amount US citizens earned as interest and dividends from abroad minus how much was paid to foreigners in interest and dividends
net transfers
money our government and citizens send as gifts or aid to foreigners minus how much foreigners send to us in gifts and aid
official reserves
government’s holdings of foreign currencies
open economy
an economy with foreign trade
trade deficit
excess of a nation’s imports over its exports
trade surplus
excess of a nation’s exports of over its imports
balance of payments
current account +capital account
Categories: Macroeconomics