AP Macro Exam Vocab – Flashcards
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economics
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a system that coordinates choices about production with choices about consumption, and distributes goods and services to the people who want them
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market economy
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production and consumption of goods and services are direct result of decentralized decisions by man firms and individuals
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command economy
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there is a central authority (usually the government) making production and consumption decisions
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incentives
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something that makes people want to produce more goods and services
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marginal analysis
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study of costs and benefits of doing a little bit more of an activity versus a little bit less
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marginal benefit
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the gain from doing something one more time
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marginal cost
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the cost of doing something one more time
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Factors of production
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Land, Labor, Capital, Entrepreneurship
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opportunity cost
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the value of the best desires alternative you must give up when you make a particular choice
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microeconomics
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concerned with how individuals, households, or firms make decisions and the consequences of those decisions
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macroeconomics
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concerned with the overall ups and downs of the economy
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aggregate output
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an economy's total production of goods and services for a given period of time, usually a year
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deflation
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a fall in the overall price level
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inflation
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a rise in the overall price level
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trade-off
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when you give up something in order to have something else
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PPC
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model that helps us improve our understanding of trade-offs, efficiency, and economic growth
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Shifts of the PPC
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increase in the resources used to produce goods and service, progress in technology
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trade
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exchange of goods and services
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comparative advantage
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if the opportunity cost of producing the good or service is lower for that individual than for other people
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market
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a group of producers and consumers who exchange a good or service for payment
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competitive market
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a market in which there are many buyers and sellers, no one individual can dictate the price
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demand schedule
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a table showing ow much of a good or service consumers will want to buy at different prices
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law of demand
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as the prices rise, quantity demanded falls
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causes of the demand curve shifting
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change in the prices of related goods or services, changes in income, changes in tastes, changes in expectations, changes in the number of consumers
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normal goods
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demand for them increases when consumer income rises
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inferior goods
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demand for them decreases when consumer income rises
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quantity supplied
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quantity that producers are willing to produce and sell
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market demand curve
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demand curve
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change in supply
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shift of the supply curve
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change in quantity supplied
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refers to movement along the supply curve
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factors that shift the supply curve
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changes in input prices, changes in the prices of related good, changes in technology, changes in expectations, changes in the number of producers
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input
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anything used to produce a good or service
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technology
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all methods people can use to turn inputs into useful goods and services
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equilibrium
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where quantity demanded is the same as quantity supplied
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price controls
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legal restrictions on how high or low a market price may go
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price ceiling
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the maximum price sellers are allowed to charge for a good or service
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price floor
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minimum price buyers are required to pay for a good or service
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model
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simplified version of reality that is used to better understand real-life situations
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circular flow diagram
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simplified version of the economy
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household
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a person or group of individuals who share income
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firm or business
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an organization that produces goods and services for sale
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product markets
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where goods and services are bought and sold
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factor markets
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where resources, especially capital and labor, are bought and sold
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consumption expenditures
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household spending on goods and services
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GDP
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total market value of all final goods and services produced in the economy during a given year
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Real GDP
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total value of all final goods and services produced in an economy during a given year, calculated using the prices of a selected base year
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Real GDP
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the total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year
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Nominal GDP
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total value of all final goods and services produced in the economy during a given year, calculated with the prices current in the year in which the output is produced
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employed
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people are currently holding a job in the economy, either full time are part time
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unemployed
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people who are actively looking for a job but aren't currently employed
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labor force
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equal to the sum of the employed + unemployed
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labor force participation rate
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percentage of the population aged 16 and older that is in the labor force
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unemployment rate
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defined as the percentage of the total number of people in the labor force who are unemployed
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discouraged workers
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nonworking people who are capable of working but have given up looking for a job due to the state of the job market
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marginally attached workers
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would like to be employed and have looked for a job in the recent past but are not currently looking for work. Discourage workers are part of this group
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underemployed workers
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people who work part time (might be over-qualified for their job) because they cannot find full-time jobs
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frictional unemployment
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unemployment due to the time workers spend in job search
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structural unemployment
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unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate
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cyclical uneployment
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unemployment that arises from the business cycle
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actual unemployment
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natural unemployment + cyclical unemployment
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inflation rate
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percent increase in the overall level of prices per year
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inflation rate
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(price level in year 2 - price level in year one) / (price level in year one)
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nominal interest rate
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interest rate actually paid for a loan
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real interest rate
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nominal interest rate minus the rate of inflation
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disinflation
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the process of bringing the inflation rate down
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real wage
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nominal wage divided by the price level
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real income
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nominal income divided by the price level
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aggregate price level
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measure of the overall level of prices in the economy
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consumption bundle
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typical basket of goods and services
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price index
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measures the the cost of purchasing a given market basket in a given year. Index value is normalized so that it is equal to 100 in the selected base year
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consumer price index
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measures the cost of the market basket of a typical urban American family
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producer price index
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measures change in the prices of goods and services purchased by the producers
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GDP deflator
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isn't exactly a price index, but it serves the same purpose
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marginal propensity to consume
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measures the increase in consumer spending when disposable income increases $1
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marginal propensity to save
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the fraction of the additional dollar of disposable income you save
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autonomous change in aggregate spending
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an initial rise or fall in aggregate spending
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current disposable income
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income-taxes+government transfer
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government transfers
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are any payments one may receive from the government
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consumption function
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an equation showing how an individual household's consumer spending varies with the household's current disposable income
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individual consumption function
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shows a microeconomic relationship between the current disposable income of individual household and their spending on goods and services
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aggregate consumption function
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the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending
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factors that shift aggregate consumption function
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changes in expected future disposable income, changes in aggregate wealth
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permanent income hypothesis
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states that consumer spending ultimately depends on the income people expect to have over the long term rather than on their current income
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planned investment spending
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investment spending that firms intend to undertake during a given period
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inventories
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stocks of goods held to satisfy future sales
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unplanned inventory investment
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where are firm's inventories are higher than intended due to an unforseen decrease in sales
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inventory investment
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the value of the change in total inventories held in the economy during a given period
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actual investment
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= planned investment spending plus unplanned inventory investment
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aggregate demand curve
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shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, business, the government, and the rest of the world
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factors that shift aggregate demand curve
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changes in expectations, changes in wealth, size of existing stock of physical capital, government policies
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monetary policy
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when the central bank increases or decreases the amount of money in circulation
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aggregate supply curve
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shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy
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factors that shift SRAS
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changes in commodity prices, changes in worker's, compensations, changes in productivity
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commodity
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a standardized input bought and sold in bulk quantities
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factors that shift LRAS
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change in quantity of resources, changes in quality of resources, technological progress
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AD-AS model
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aggregate supply curve and aggregate demand curve are used together analyze economic fluctuations
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short run macroeconomic equilibrium
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where AD and SRAS meet
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demand shock
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an event that shifts the aggregate demand curve
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supply shock
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an event that shifts the SRAS curve
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stagflation
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a negative supply shock shifts the SRAS curve to the left, which leads to a lower aggregate output and a higher price level
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long-run microeconomic equilibrium
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where the SRAS, AD, and LRAS all meet
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output gap
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the percentage difference between actual aggregate output and potential output
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stabilization policy
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the use of government policy to reduce the severity of recessions and control inflations
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expansionary fiscal policy
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increases aggregate demand (an increase of purchases of goods and services, a cut in taxes, a increase in government transfers)
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contractionary fiscal policy
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reduces aggregate demand (a decrease in government purchases of goods and services, an increase in taxes, a decrease in government transfers)
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lump-sum taxes
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which the amount of tax a household owes is independent of its income
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automatic stabilizers
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economic policies and programs that automatically offset fluctuation sin a nation's economic activity
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discretionary fiscal plicy
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fiscal policy that is the direct result of deliberate actions by policymakers rather than automatic adjustments
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savings-investment spending identity
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savings and invest spending are always equal for the economy as a whole
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budget surplus
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when the government saves more than it spends
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government budget balance
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the difference between tax revenue and government spending
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inflows
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foreign savings that finance investment spending in the country
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outflows
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domestic savings that finance investment spending in another country
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capital inflows
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total inflow of foreign funds - total outflow of domestic funds to other countries
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financial markets
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where households invest their current savings and their accumulated savings by purchasing financial assets
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financial asset
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a paper claim that entitles the buyer to future income from the seller
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liability
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requirement to pay money in the future
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physical asset
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a claim on a tangible object that gives the owner the right to disposes of the object as he or she wishes
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transaction costs
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are the expenses of actually putting together and executing a deal
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diversification
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when a person invest in several different assets so that the possible losses are unrelated and independent events
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liquid
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if something can quickly be converted to cash
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illiquid
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if something cannot be converted to cash
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bond
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an IOU
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stock
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a share in the ownership of a company
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bank deposit
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a claim on a band that obliges the bank to give the depositor his or her cash when demanded
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financial intermediary
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an institution that transforms funds gathered from many individuals into financial assets
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pension funds
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nonprofit institutions that collect the savings of their staff member and invest those funds in a wide variety of assets, providing these members income when the retire
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life insurance companies
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sell policies that guarantee a payment to a policy holder's beneficiaries when the policyholder dies
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cash
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currency in circulation
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checkable bank deposits
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bank accounts on which people can write checks
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money supply
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the total value of financial assets in the economy that are considered money
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medium of exchange
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an asset that individual s use to trade for goods and services
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store of value
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a means of holding purchasing power over time
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unit of account
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measure used to set prices and make economic calculations
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intrinsic value
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actual (value)
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fiat money
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money not backed by any commodity
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M1
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transactions money, money that can be directly used for transactions, most liquid
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M2
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broad money, M1 money + several other types of assets
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near-moneys
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other types of assets that can be easily converted into cash
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bank
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financial intermediary that uses liquid assets in the form of bank deposits to finance the illiquid investment of borrowers
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required reserve ratio
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fraction of a bank deposits that bank holds as reserves
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required reserve ratio/
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the smallest fraction of bank deposits that a bank must hold
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bank runs
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when many depositors try to withdraw their money at the same time
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discount window
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the federal reserve would lend money to a bank if needed
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central bank
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an institution that oversees and regulates the banking system and controls the money supply
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Federal Open Markets Committee
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committee that makes all the decisions for the fed
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federal funds market
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where banks can borrow from other banks if their reserves get too low
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federal funds rate
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the interest rate at which loans are borrowed at on the federal funds market
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discount window
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where commercial banks can borrow from the fed if their reserves get too low
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discount rate
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the rate at which funds are borrowed in the discount window
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open market operations
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consists of the buying and selling of government bonds to commercial banks and the general public
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money demand
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refers to the amount of money individuals and firms want to hold at any given time
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loanable funds market
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one market that brings together those who want to lend and those who want to borrow
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carbon tax
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tax per unit of carbon emitted
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cap and trade system
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total number of emissions is capped and producers must buy licence to emit greenhouse gasses
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budget
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estimate of its total spending and total revenue
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budget surplus
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government revenue > total government spending
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budget deficit
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government revenue < total government spending
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balanced budget
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total government spending=Total government radio
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public debt
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(national debt) government debt held by individuals and institutions outside the government
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crowding out effect
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when the government borrows funds in the financial markets, it is competing with firms that plan to borrow funds for investment spending, which discourages investment spending and increases interest rates
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debt-GDP ratio
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the government's debt as a percentage of GDP
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implicit liabilities
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spending promises made by government that are effectively a debt despite the fact that they are not included in the usual debt statistics
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short-run Phillips curve
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the negative relationship between the unemployment rate and the inflation rate
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expected rate of inflation
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the rate that employers and workers expect in the near future
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classical economics
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assumes that wages and prices adjust instantly to clear markets and reach equilibrium
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keynesian economics
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aggregate demand could be changed to address the fluctuations in the economy and the government would oversee the shift of aggregate demand
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monetarism
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GDP will grow steadily if money supply grows steadily
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Quantity theory of money
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steady growth in the money supply by Fed would ensure steady growth in spending, and therefore in GDP
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Real GDP per capita
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real GDP divided by population size
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labor productivity
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output per worker
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aggregate production function
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hypothetical function that shows how productivity depends on the quantity of physical capita per worker and the state of technology
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balance of payment accounts
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summary of the country's transactions with other countries
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trade balance
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the difference between a country's exports and imports of goods alone
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foreign exchange
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all currencies other than the domestic currency of a given country
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foreign exchange market
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where currencies can be exchanged for each other
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exchange rates
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the price at which currencies trade
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appreciated
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when a currency as become more valuable in terms of other currencies
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depreciated
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when a currency becomes less valuable in terms of other currencies
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real exchange rates
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adjusted for international differences in aggregate price levels
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purchasing power parity
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nominal exchange rate at which a given basket of goods and services would cost the same amount in both countrues
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exchange rate regimes
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rule governing policy toward the exchange rate
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fixed exchange rate
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when the government keeps the exchange rate against some other currency at or near a particular target
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floating exchange rate
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when the government lets the exchange rate go wherever the market takes it
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exchange market intervention
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government purchases of currency in foreign exchange market
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foreign exchange reserves
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stocks of foreign currency that governments maintain to buy their own currency in the foreign exchange market
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devaluation
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a reduction in the value of a currency that is set under a fixed exchange rate regime
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revaluation
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an increase in the value of a currency that is set under a fixed exchange rate regime is called a reevaluation
