AP MACROECONOMICS FINAL EXAM
…, the study of how society manages its scarce resources
…not enough to go around
…simple things that satisfy human wants, used to make other things
…, all other things held constant
…, all the alternatives that we give up whenever we choose one course of action over another
…the study of aggregate economic variables. And the national and global economy
…study of decisions individual businesses make
…central authority makes decisions on production and consumption. (Soviet Union)
…, An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works.
…, the part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics
…production resources from nature. (water trees) pay rent.
…human resources. (physical effort, knowledge and skills). Pay wages, salary.
…produced tools of the trade. (buildings, machines, tools). pay interest.
…the intelligence, imagination and ability to take risks needed to start up and maintain a business (Bill Gates). profit.
producers and consumers decide what is made, how much, and for whom.
…all resources are being used efficiently
…, our nations resources are being allocated in the most efficient manner possible
consumer vs. capital goods
…consumer goods are:shoes food, clothes. capital goods are man-made tools of production: a fishing boat, a machine.
production possibilities curve
… illustrates trade-offs and the optimum efficiency
…what must be given up to get what you want
…expansion of the production possibilities frontier.
…how the questions “what to produce?”, “how to produce it?” and “For whom is it produced?”
..economic decisions made based on what has always been done. traditions.
circular flow model
…represents transactions in an economy
graphed demand schedule
…how much consumers will be willing and able to buy at all different price levels
…actual amount consumers are willing and able to buy at a specific price
law of demand
…at a higher price, less is demanded.
factors of demand
Related goods (price)
# of Buyers
a rise in income increases the demand for
a rise in income decreases the demand for
a similar cheaper product will be substituted for more expensive goods
change in demand (curve)
entire curve can be shifted by factors of demand. (TRIBE)
a pair of goods that when one price decreases, ppl are more likely to buy the other. EX: free parking next to a stadium increases ticket sales
…graphed supply schedule
…how much of a good or service Producers are willing and able to supply at every price
law of supply
…higher price = higher Quantity supplied.
…how much producers are w&A to produce at one price level
Factors of supply
Resources: cost and availability
Other goods’ prices
Taxes, subsidies, gov regulations
Expectations of the producer
Number of firms in the industry
Change in supply curve
…left is less. right is more
…intersection of economic lines. (supply and demand). quantity supplied = quantity demanded @ a certain price.
market clearing price
…causes economy to move toward equilibrium price.
…quantity supplied is greater than quantity demanded.
…quantity demanded is greater than quantity supplied
…gov set price below equilibrium
*legal price maximum
…gov sets price above equilibrium
*legal price minimum
Gross domestic product (GDP)
…total dollar value of all FINAL goods and services in one year. C+I+G+ Xn= GDP
…bought from firm to firm that are inputs in producing final goods and services
…goods and services sold in the end to the consumer
GDP measuresd with this approach
gross private domestic investment
…market value of built, but NOT sold goods.
…government expenditures on goods and services
indirect business taxes
…taxes hidden in the purchase price (like gas)
consumption of fixed capital
…consumption of fixed capital
net domestic product
…subtract depreciation (consumption of fixed capital) from GDP.
keeps economy’s output from being overstated.
…income directly and indirectly earned by household.
includes:welfare and unemployment benefits
…actual amount to spend
…GDP not adjust for inflation. shows final value of Goods and Services.
a number that compares prices in one year with some earlier base year
……measures changes in prices of goods in a specific market basket that consumers purchase.
…the highs and lows of a the economy as people buy and sell goods and services
real output/ input
…high point in economy. during growth
…lowest point during economic contraction
…economy expands moving from a trough to a peak
an increase in RGDP
rule of 70
…70 / annual % rate of growth in economy = how long it will take for economy to double
…people over 16 who:
-are employed or actively seeking employment
# of employed / # in work force
unemployed people who have given up looking for a job
…voluntary unemployment. short term as workers move from one job to another. as they look for a better opportunity
involuntary unemployment. change in the structure of an economy. Workers skill do not equal employers needs.
involuntary employment. caused by decrease in total spending in the economy. Businesses do not need as many workers to meet the demand.
natural rate of unemployment
…3-5% unemployment. there is always structural and frictional unemployment
forfeited output due to failure to create sufficient jobs
…, 1 percent more unemployment results in 2 percent less output
…increase in price level over time
Demand pull inflation
…prices increase b/c consumer demand increase
Cost push inflation
…prices increase b/c the cost of making a product increases
nominal vs. real income
…nominal is not adjust for inflation. real is adjust for inflation
cost of living adjustments
…extra money from the government or an employer to offset the impact of inflation. based on CPI or PPI
…, indicates the amounts households plan to save at different income levels, given a price level
…marginal propensity to consumer, marginal propensity to save.
Investment demand curve
…, a curve that shows the amounts of investment demanded by an economy at a series of real interest rates
the amount that firms plan or intend to invest
The total amount of spending on final goods and services in the economy; consumption ( spend-ing by consumers), investment ( (spend-ingbyconsumers),investment( spending by business), spending by government, and net foreign spending on U. S. goods ( the difference between U. S. exports and U. S. imports).
the GDP at which the total quantity of final goods and services purchased is equal to the total quantity of final goods and services produced
Occurs when actual sales are more or less that businesses expected, leading to unplanned changes in inventories.
expenditure multiplier (1/(1-MPC))
…change in expenditure X multiplier = change in GDP
tax multiplier (-MPC/MPS)
…Change in taxes X mulitplier = Change in GDP
balanced budget multiplier (always=1)
… MPC + MPS
…operating below full employment . Unemployment > 5%
…above equilibrium. inflation is probably >5%
lump sum tax
A tax that is the same amount for every person.
…total amount of goods and services consumers are willing and able to consumer. C+I+G+Xn
real balances effect
when a price increases, your buying power is decreased, causing you to buy less
interest rate effect
as price level decreases consumers demand for money increases.
~interest rates (the price of money) increase
~increased interest rates cause investment components of aggregate demand to decrease
foreign purchases effect
…, increase in the price level ( relative to foreign price level) will reduce US exports bc Us products are now more expensive for foreigners and epxand US imports bc foreign products are less expensive for Us consumers. as a consequence, net exports will decrease which means there wil a decrease in the quantity of good and services demanded in the US econony as the price level rises. a decrease in the price level will have opposite effect
…short run and long run. ASSR price changes with demand. can cause inflation. ASLR does not change with different price levels.
Horizontal range of AS
Keynesian Range. (many unemployed resources.) Recession
Keynesian Range of AS
Horizontal Range of AS
part of AS curve showing a healthy economy. approaching full employment. price and wages increase.
slopey part of AS
Intermediate Range of AS
vertical or classical range
…part of AS curve showing economy at full employment. Increased demand only results in higher prices. not in increased productivity.
the cost to firms of changing prices
the government uses taxes and spending policies to battle economic problems.
when the government spends more more money than it collects annually in taxes.
contractionary fiscal policy
policy by the government to combat inflation. EX: increased personal income taxes and decreased government spending.
when the government is receiving more money in taxes annually than it is spending.
…a change to the economy that occurs naturally and is not caused by government intervention.
…, A tax rate that increases as the amount of ones income increases
…, taxes that require all income groups to pay the same percentage of their income in taxes
an income tax whose rates decrease as income level rises
full employment budget
… What the federal budget would be if the economy were producing at a full-employment level of output.
crowding out effect
The government is demanding more from the loanable funds market. This increases interest rates which makes it more difficult for businesses and consumer to borrow from the loanable funds market.
…economic belief that any problem in the economy can be solved by lessening business taxes and regulation.
periods between the time fiscal policy is enacted and the time it becomes effective
council of economic advisors
…, established by Employment Act of 1946- advise the President on economic policy- 3 members, appointed by President and approved by Senate,
employment act of 1946
…, Enacted by Truman, it committed the federal government to ensuring economic growth and established the Council of Economic Advisors to confer with the president and formulate policies for maintaining employment, production, and purchasing power
the physical medium of exchange.
must be portable, durable, scarce, and uniform
medium of exchange
unit of account
…standard of value. (ex. a $200 car vs a $20,000 car)
store of value (wealth)
stabilizes value of money. this allows for savings accounts.
smallest most liquid form of money
includes: checkable/demand deposits, travelers checks, coins and currency
NOT vault cash.
…, Bills or coins for which the amount printed on the currency bears no relationship to the value of the paper or metal embodied within it; for currency still circulating, money for which the face value exceeds the commodity value.
…, objects that have value in themselves and are also used as money
money backed by federal government.
…, are also known as demand deposits. These are checking accounts
if longterm deposit is worth more than initial investment
total demand for money
…, the sum of the transactions demand for money and the asset demand for money.
…, demand for money as a medium of exchange to make payments. The level varies directly with nominal GDP
the demand for money as a store of value instead of other assets such as certificates of deposit, corporate bonds or stocks
federal reserve system
the central bank of the U.S.. Uses monetary policy to stabalize the economy. Act as the banker bank
Board of Governors (BOG)
7 governors who are nominated by the president and confirmed by the senate. they serve 14 year terms. They make decisions for the Fed.
Federal Reserve Banks
the 12 banks chartered by the U.S. government to control the money supply and perform other functions.
Fractional reserve system
system requiring financial institutions to set aside a fraction of their deposits in the form of reserves
Required Reserves plus Excess Reserves.
Federal funds rate
the interest rate at which banks loan money to other banks
shows how much a new deposit in the bank can impact the money supply (1/ reserve requirement)
required reserve ratio
RRR, the amount of money each bank must keep by law from every dollar deposited in the bank. ($in vault)
reserves that banks hold over and above the legal requirement
The currency a bank has in its vault and cash drawers.
Federal Reserve Board’s regulation of the supply of money in circulation.
open market operations
…, the buying and selling of government securities to alter the supply of money
…the interest rate the Fed charges banks to borrow from the Fed in order to meet reserve requirements.
…, the economic condition in which credit is difficult to secure and interest rates are high
velocity of money
…, the rate at which money changes hands
the equation of exchange.
M= the stock of money (M1)
V= velocity of circulation
P= average price level
Q= quantity of G&S
Prime interest rate
…, the lowest rate charged by a bank for a short-term loan
…, When monetary policy is highly effective in slowing expansion and controlling inflation but much less reliable in pushing the economy from a recession
…, states that bad money drives good money out of circulation
Factors of production
Land, Labor, Capital, Entrepreneurship
country is best at making 2 products
country isn’t as good at making a product, but has a lower opportunity cost at making one product.
labor intensive good
A product requiring a relatively large amount of labor to be produced (Digital camera, DVD player etc)
land intensive good
A product requiring a relatively large amount of land to be produced (Coffee, wheat etc)
capital intensive good
A product that requires a relatively large amount of capital to be produced (automobiles, chemicals etc)
terms of trade
an agreement regarding how much each product will cost in terms of other products being exchanged.
a tax on imported goods
a tariff imposed to raise revenue
a tax on imported goods that raises the price of imports so people will buy domestic goods
a limit on the amount of a good that can be imported
non-tariff barrier (NTB)
…, all barriers other than protective tariffs that nations put in place to impede international trade. (ex: import quotas, licensing requirements, unreasonable product quality standards, etc)
…, Selling products in a foreign country at lower prices than those charged in the producing country
World Trade organization
…, an international organization based in Geneva that monitors and enforces rules governing global trade
balance of payments
the difference between the amount of money that comes into a country and the amount that goes out of it
In the balance of payments, this records transactions involving the export or import of goods and services
a measure of the buying and selling of assets between countries. The assets are often separated to show assets that represent ownership and assets that represent lending
floating exchange rates
Prices of different currencies move up and down based on the demand for and the supply of each currency
includes all M1 PLUS…
~small time deposits (CDs)
the economic condition in which credit is easy to secure