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AP Macroeconomics

AP Macroeconomics Exam Review Vocab

TermDefinition
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
Created by: emilyjane1221