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AP Macro Unit 2
Part One
| Term | Definition |
|---|---|
| Macroeconomics | Focus is on National and International Economics |
| Microeconomics | focuses on individual businesses, product markets and consumers of certain goods/services |
| Gross Domestic Product (GDP) | the money value of all new/final goods and services produced in a country in a given year (most often used measurement of economic well-being) |
| Final Goods | products in their final form |
| Intermediate Goods | products which go into the making of another final good |
| Not Counted by the GDP | used goods, illegal markets, purchase of stock |
| Expenditure Model (also for Aggregate Demand) | Consumption (C) + Investment (I) + Government (Purchases) Spending on Goods and services (G) + Net Exports (Nx) |
| Income Model (National Income) | Wages (cost of Labor) + Rent (cost of Land) + Interest (cost of Capital) + Profit (Total Revenue – Total Cost) |
| Real GDP | GDP adjusted for inflation (percent increase in GDP - rate of inflation = real GDP) |
| Nominal GDP | GDP not adjusted for inflation |
| Real Per Capita GDP | real GDP divided by population; best measurements of a nation's standard of living |
| The Underground Economy | transactions that are not recorded by the IRS and not counted in GDP |
| Aggregate Demand | the amount of real GDP that will be demanded at all possible price levels (calculated the same as expenditure GDP) |
| Aggregate Supply | the amount of real GDP that will be produce at all possible price levels |
| Inflation | a rise in the general level of prices; most often used measurement of inflation is the Consumer Price Index |
| Deflation | a decline in the general level of prices (price level); very bad for the economy while it sounds like a good idea) |
| Unemployment Rates | percentage of the civilian labor force that is not working |
| Civilian Labor Force | non-defense, 16 or older, either working full-time, or actively pursuing full-time work |
| Economic Growth | refers to the long term ability of a country to produce goods and services |
| Business Cycle | refers to the historic pattern in market economies of recurring expansions and recessions; accepted by most mainstream economists that this pattern is natural to the market economy |
| Expansion | period of real GDP growth (1st stage of business cycle) |
| Peak | point of maximum Real GDP growth (2nd stage) |
| Recession | 6 consecutive months of decline in Real GDP (3rd stage of business cycle) |
| Trough | point at which a recession bottoms out and begins to grow again (4th stage of business cycle) |
| Circular Flow of the Economy | illustration that the money businesses spend to produce products comes back to them when consumers/households purchase products |
| Product Market | where consumer goods are bought and sold |
| Factors Market | where factors of production are bought and sold |
| Firms | the businesses that produce/sell goods and services (they buy factors of production and sell consumer goods) |
| Households | provide the factors of production and purchase consumer goods |
| Leakages | savings and money that leaves the circular flow |
| Injections | investments and extra money that enters the circular flow from outside |
| Say's Law | the act of creating a product (creates the demand for that product) |
| Flexible Prices | when economies are in a recession, prices will begin to drop to the point where that increases aggregate demand and cure recession |
| Flexible Prices | when an economy is experiencing severe inflation, prices will rise to the point where aggregate demand will be reduced and this will correct the inflation |
| Classical Economics | belief that the government should have little or no role in regulating economic activity; believe the economy is self-correcting in the long run |
| Price as Natural Stabilizer | Belief that in the long run Price will correct economic problems naturally (flexible prices) |
| Demand-Side Economics (Keynesian Economics) | believed that recessions were caused by a drop in consumer spending and business investment, lowering aggregate demand/GDP; government must respond to correct this problem by increasing aggregate demand |
| Automatic Stabilizers | government programs that automatically put money into the hands of consumers (increases disposable income) during recessions and reduces disposable income to combat inflation |
| Examples of Automatic Stabilizers | unemployment insurance (compensation), social welfare programs, graduated (progressive income tax) |
| Fiscal Policy | taxing and spending policy; decreases taxes in individuals to increase disposable income and increase consumption; increases in government spending both on goods and services and transfer payments to increase disposable income and increases consumption |
| Monetary Policy | control interest rates by Central Banks/Federal Reserve Systems; lower interest rates to increase investment (I) with is business investment in new capital goods, inventory and new home purchases by households |
| Inventory | products that are available for sale |
| Contractionary Policy | used to reduce government spending or the rate of monetary expansion by a central bank to combat rising inflation (raising interest rates, increasing bank reserve requirements, and selling government securities) |
| Stagflation | high rates of inflation and low GDP growth (high unemployment); caused by supply shocks |
| Expansionary Policy | intended to boost business investment and consumer spending by injecting money into the economy either through direct government deficit spending or increased lending to businesses and consumers |
| Marginal Tax Rates | additional tax paid on each additional dollar earned (lower marginal tax rates increases work and production due to lower cost for businesses) |
| Classical Phase | vertical phase; prices will continue to rise but production does not increase (in the graphic it is labeled highly steep range) |
| Recession Phase | horizontal phase; as an economy comes out of a recession real GDP can increase without a significant increase in prices |
| Intermediate Phase | prices begin the rise as the economy expands; producers react to higher prices by producing more products (upward sloping) |
| Flexible Wages | as an economy expands wages will rise easily as prices rise and as prices rise so will wages |
| Sticky Wages | keynesian belief that as the economy expands (GDP rises) wages will go up only slowly and prices will rise faster than wages |
| Supply Shocks | something that causes significantly less to be produced because of sharp and unexpected increase in the cost of production (cause a shift in the aggregate supply curve to the left) |
| Supply-Side Economics (Reaganomics) | economic theory that focuses on increasing aggregate supply rather than aggregate demand as the preferred way to correct economic problems (cut marginal tax rates on individuals and businesses) |
| Phillips Curve | illustrates the historical relationship between the unemployment rate and the rate of inflation; the relationship is what when one of those statistics go up the other one goes down |
| Laffer Curve | belief that reductions in marginal tax rates on individuals and business will create major incentives to make more money; by doing this lower marginal tax rates can increase the tax base so much that cuts in taxes can increase government revenue |
| Deregulation | reducing or eliminating government regulation on businesses (lowers the cost of production and increases aggregate supply) |
| Long Run Aggregate Supply | vertical representation of the aggregate supply curve (aka full employment GDP or potential GDP) |
| Abundant Reserves | a framework in which the central bank ensures that there is a large amount of excess reserves in the banking system; open market operation have limited effect on interest rates |
| Limited Reserves | changes in the money supply have a significant impact on interest rates and the overall economy |
Created by:
rcooke
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