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AP Macroeconomics
AP Macroeconomics Exam Review Vocab
| Term | Definition |
|---|---|
| Positive economics | The type of economics that deals with factual or "what is" statements |
| Normative economics | The type of economics that deals with value judgments or what ought to be |
| Four factors of production | Land, labor, capital, entrepreneurship |
| Scarcity v. shortage | Scarcity - occurs at all times for all goods Shortage - a temporary period when producers won't or can't offer goods/services at current prices |
| Price v. cost | Price - the amount the consumer pays Cost - the amount the seller pays to produce a good |
| Production possibilities curve | Shows alternative ways an economy can use scarce resources |
| Productive efficiency | Products are being produced in the least costly way (any point on the PPC) |
| Allocative efficiency | The products being produced are the ones most desired by society (depends on the desires of society) |
| Two ways economic systems differ | Who owns the factors of production and the method used to motivate, coordinate, and direct economic activity |
| Freedom of enterprise | Businesses can obtain and use economic resources to produce and sell their choice of products |
| Freedom of choice | Owners can use and dispose of their property/money as they see fit, workers can enter any field for which they are qualified, and consumers can buy whatever goods their budget will allow |
| What promotes technology advances in a free market? | Competition, freedom of choice, self-interest, and personal reward |
| The three fundamental economic questions | What goods/services will be produced? How will they be produced? Who will consume the goods/services? |
| The Invisible Hand | In a market economy, businesses will promote the public interest as well as their own self-interest |
| Income effect | A lower price increases the purchasing power of a buyer's money income, enabling him or her to purchase more of the product than before |
| Normal good v. inferior good | Normal good - demand varies directly with income Inferior good - demand varies inversely with income |
| Demand curve shifters | population, income, consumer tastes/advertising, consumer expectations, demographics, complements and substitutes |
| Supply curve shifters | price and availability of inputs/resources, number of sellers, technology, government actions, opportunity cost of alternate production, expectations of future profit |
| Price ceiling | A maximum price that can legally be charged, creates natural shortage |
| Price floor | A minimum price that can legally be charged, creates a natural surplus |
| Modern economic growth | When output per person rises (as opposed to when output just rises because of population growth) |
| Two ways countries can experience economic growth | Savings and intestments |
| Inventory | A store of output that has been produced but not yet sold |
| Price war | When firms repeatedly match each other's price cuts |
| GDP expenditures approach | C + I + G + (X-M) |
| GDP income approach | compensation of employees, rents, interest, proprietor's income, corporate profits, taxes on production and imports, national income |
| Price index | A measure of the price of a collection of goods and services (called a market basket) in a given year as compared to an identical or similar collection of goods and services in a reference year |
| Leader countries v. follower countries | -Leader countries - develop new technology, can only grow 2 or 3% per year -Follower countries - poorer countries that adopt other countries' inventions, can grow much faster |
| Institutional structures that promote growth | strong property laws, patents and copyrights, efficient financial institutions, literacy and widespread education, free trade, a competitive market system |
| Factors that affect rate of economic growth | Increase in quality/quantity of natural or human resources, increase in the supply/stock of capital goods, improvements in technology, increased demand to match production, economic efficiency/full employment |
| Types of unemployment | frictional - people who are between jobs or looking for a first job (includes seasonal), structural - when consumer demand and technology change the available jobs, cyclical - caused by a decline in total spending |
| Full employment | When an economy is only experiencing frictional and structural unemployment |
| Okun's Law | For every one percentage point by which an actual employment rate exceeds the natural rate (above 4-6% unemployment), GDP falls by about 2% |
| Demand-pull inflation | When businesses can't keep up with demand, so they raise prices |
| Cost-push inflation | When output and employment are declining while general price levels are rising |
| Real v. nominal interest rates | Real interest rates - the percent increase in purchasing power that the borrower pays the lender Nominal interest rates - the percent increase in money that the borrower pays the lender |
| Aggregate demand | The total amount of goods and services demanded in a country (graph is downward sloping) |
| Real Balance Effect | Higher prices reduce purchasing power and thus spending |
| Interest Rate Effect | Higher prices --> higher interest rates --> less spending |
| Foreign Purchases Effect | Higher U.S. prices relative to other countries --> more imports and fewer exports |
| Shifters of aggregate demand | -a change in one of the determinants of aggregate demand (C + I + G + X-M) that changes the GDP -a multiplier effect that produces a greater ultimate change in aggregate demand than the initiating change in spending |
| Consumer wealth | The total dollar value of all assets owned by consumers minus their debts |
| Aggregate supply | The total amount of goods and services supplied in a country - horizontal line in the immediate short run, upward sloping in the short run, vertical line in the long run |
| Shifters of aggregate supply | inflation expectations (if people expect higher prices in the future, AS will go down), resource prices, actions by the government, productivity (technology increases for failures) |
| Fiscal policy | Deliberate changes in government spending and tax collection designed to achieve full employment, control inflation, and encourage economic growth |
| Expansionary fiscal policy | Used in a recession - involves increasing spending and/or cutting taxes |
| Budget deficit | Government spending in excess of tax revenues |
| Tax cuts in expansionary fiscal policy | Must be larger than the proposed increase in government spending + the smaller the MPC, the greater the cut must be |
| Contractionary fiscal policy | Used during demand-pull inflation - involves decreasing spending and/or increasing taxes |
| The ratchet effect | Increases in AD ratchet the price level up, but declines in AD don't ratchet the price level down |
| Built-in stability | Tax revenues automatically change over the course of the business cycle, stabilizing the economy (taxes vary directly with GDP) |
| Transfer payments | Unemployment, welfare, etc. - vary indirectly with GDP |
| Built-in stabilizer | Anything that increases the government's budget deficit/reduces its surplus in a recession AND increases its budget surplus/reduces its deficit in an expansion without explicit actions from policymakers |
| Progressive tax | The average tax rate rises with GDP - causes built-in stability |
| Regressive tax | The average tax rate falls as GDP rises |
| Proportional tax | The average tax rate remains constant |
| The crowding-out effect | An expansionary fiscal policy may increase the interest rate and reduce investment spending, weakening or cancelling out the stimulus |
| Public debt | The accumulation of deficits (minus the surpluses) the federal government has incurred through time |
| U.S. securities | Financial instruments issued by the federal government to borrow money to finance expenditures that exceeded tax revenues |
| Classical economics | The economy works better without intervention - Adam Smith, David Ricardo, Thomas Malthus |
| Keynesian economics | The AD is influenced by private and public economic decisions, output during recessions is influenced by fiscal and monetary policy - John Maynard Keynes |
| Discretionary fiscal policy | Congress creates new bill to change AD through government spending or taxation - process can lag due to bureaucracy and the time it takes to enact |
| Non-discretionary fiscal policy | AKA automatic stabilizers, permanent spending or taxation laws enacted to work counter-cyclically and stabilize the economy - welfare, unemployment, minimum wage |
| Functions of money | Medium of exchange (facilitates trade), unit of account (measures the worth of goods), store of value (keeps its value, allowing people to transfer their purchasing power to the future) |
| Liquidity | The ease with which an asset can be converted into cash (the most widely accepted and easily spent form of money) with little or no loss of purchasing power |
| M1 | The narrowest definition of the US money supply - includes currency in the hands of the public and checkable deposits (e.g. checking and savings accounts) |
| Near-monies | Highly liquid assets that can be readily converted into money (ex: bonds) |
| M2 | M1 + near-monies |
| Three questions that determine value | Acceptability (will people take it?), legal tender (has the government approved it?), relative scarcity (how much is there?) |
| Hyperinflation | When there's so much paper currency that the value of the dollar falls dramatically |
| The Federal Reserve System (FED) | The board that directs the activities of the Federal Reserve Banks (appointed by the president) |
| Federal Reserve Banks | Twelve banks that make up the nation's central bank |
| Quasi-public banks | Banks that blend private ownership and federal control |
| The Federal Open Market Committee (FOMC) | A committee of the FED that meets regularly to set monetary policy |
| Functions of the FED | Issuing currency, setting reserve requirements, lending money to banks, providing for check collection (when people transfer $ across the country), providing financial services to the government, supervising banks, controlling the money supply via interes |
| Monetary policy | Controlling the amount of money and credit available in the economy |
| Three tools of monetary policy | Reserve requirement (how much money must be kept in the bank, rarely used), discount rate/federal funds rate (interest rate for banks borrowing money, occasionally used), open market operations (buying and selling bonds, used every day) |
| Transactions demand | The demand for money as a medium of exchange |
| Monetary multiplier | Magnifies excess reserves into larger creations of checkable deposit money (monetary multiplier = 1/reserve ratio) |
| Prime interest rate | The benchmark interest rate that banks use as a reference point for a wide range of interest rates |
| The Taylor Rule | The FED targets 2% inflation |
| Tight money | Like contractionary fiscal policy - raise reserve ratio and discount rate and sell bonds |
| Loose money | Like expansionary fiscal policy - decrease reserve ratio and discount rate and buy bonds |
| Absolute advantage | The producer that can produce the most output or requires the fewest inputs |
| Comparative advantage | The producer with the lowest opportunity cost |
| Open v. closed economy | -Closed - focuses only on domestic prices -Open - trades for the best world price |
| Current account | Includes imports and exports, net investment income (money earned by Japanese car producers in the US) and net transfers (donations, grants, etc.) |
| Financial account/capital account | Measures the purchase and sale of financial assets that stay in a foreign country (ex: US company buys a hotel in Russia) |
| Foreign exchange market (FOREX) | If you demand one currency, you must supply your own currency |
| FOREX shifters | Change in taste, change in relative income, change in relative price level, change in relative interest rates |
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emilyjane1221
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