AP MACRO REVIEW – Flashcards
275 test answers
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all gifts of nature
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land
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manufactured/manmade tools used in production
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capital
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all human effort, physical and mental
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labor
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the risktaker that combines land, labor, and capital in order to create a new product
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entrepreneur
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income received by labor
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wages
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income received by capital
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interest
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income received by land
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rent
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income received by entrepreneurs
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profit
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use of all available resources
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full employment
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production of any particular mix of goods and services in the least costly way
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productive efficiency
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production of the particular mix of goods and services most wanted by society
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allocative efficiency
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products that satisfy our wants directly
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consumer goods
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products that satisfay our wants indirectly, by producing the goods and services we do want
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capital goods
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a graph that shows the maximum combination of any two goods that a business or economy may produce at a given time
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production possibilities curve
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law that states that the more of a product that is produced, the greater its opportunity cost
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THE LAW OF INCREASING OPPORTUNITY COSTS
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"too little of a good thing"
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MB>MC
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"too much of a good thing"
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MC>MB
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"just right"
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MB=MC
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an economic system characterized by producers and consumers acting in their own self-interest
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market economy AKA capitalism AKA free enterprise
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an economic system characterized by government control of resources ; all economic decisions made by government
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command AKA communism AKA socialism
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an economic system in which economic decisions are based on custom and religion
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traditional
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a model that shows the flow of resources, products, and money in our economy
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circular flow model
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In the circular flow model, they own/sell the factors of production and buy products
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households
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In the circular flow model, they sell products and buy the factors of production
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firms/businesses
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On the production possibilities curve, it is represented by a point outside the curve
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currently unattainable
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On the production possibilities curve, it is represented by a point inside the curve
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inefficient (caused by recession, depression, disaster)
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To achieve "full production" both of these must be achieved
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allocative efficiency and productive efficiency
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An economy can achieve the most rapid rate of growth if it focuses its resources on production of these
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capital goods
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In any given situation, they are the choices you have (also labels on the PPC)
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trade-offs
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What you give up when you make a choice
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opportunity cost
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Statement that summarizes the concept of opportunity cost; implies that there is always a cost for any choice or activity
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There is no such thing as a free lunch (TINSTAAFL)
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scarcity
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the basic economic problem; it is a lack of needed or wanted resources relative to the demand for the resources.
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TINSTAAFL
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acronym for THERE IS NO SUCH THING AS A FREE LUNCH; means that there is always a cost for a product, even if it is not evident.
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rational self-interest
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individuals pursue actions that will enable them to achieve their greatest satisfaction
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opportunity cost
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what you give up when you make a choice
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marginal analysis
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comparisons of costs and benefits
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theoretical economics
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process of deriving theories and principles in order to interpret and generalize collected facts
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economic principles
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statements about economic behavior that enable prediction
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ceteris paribus
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other-things equal assumption; assumes that all other variables except those under immediate consideration are held constant
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microeconomics
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looks at specific economic units such as businesses and consumer behavior
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macroeconomics
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study of the economy as a whole, such as total output, total employment, total income, etc.
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fallacy of composition
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a statement that is valid for an individual or part is not necessarily valid for the larger group or whole
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post hoc fallacy
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AKA post hoc, ergo propter, "after this, therefore because of this; therefore, just because A precedes B does not mean A is the cause of B
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correleation v. causation
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because two sets of date are associated does not mean that cause and effect are present
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positive economics
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states economics by facts,avoiding value judgements
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normative economics
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incorporates value judgements
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It is the responsiveness to a price change, for either supply or demand.
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elasticity
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A change in this causes a change in quantity demanded ( movement along the curve)
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price
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The market is in this state when QS=QD.
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equilibrium
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They are the determinants of demand, also known as ceteris paribus conditions; they cause a shift in the demand curve.
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Taste, income, number of buyers, expectations, related goods.
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This condition exists when QD>QS.
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shortage
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An increase in demand or supply will shift the curve in this direction.
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right
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This condition exists when QS>QD.
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surplus
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A decrease in demand or supply will shift the curve in this direction.
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left
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When demand increases (shifts right), both price and quantity will do this.
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increase
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It states that as the price of a product increases, the quantity that producers are willing to supply increases.
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the law of supply
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When demand decreases (shifts left), both price and quantity will do this.
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decrease
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On a supply curve, it is the relationship between price and quantity supplied.
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positive/direct
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A change in this causes a change in the quantity supplied (movement along the supply curve).
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Price
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When supply decreases (shifts left), what happens to price and quantity?
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Price increases, quantity decreases
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They are the determinants of supply.
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Resources, other goods that may be produced with the resources, techonology,taxes,expectations of sellers, number of sellers, subsidies.
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When supply increases, what happens to price and quantity?
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Price decreases, quantity increases.
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They are the characteristics of the market system.
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economic freedom, voluntary exchange, private property, profit motive.
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The production and use of capital goods to aid in the production of consumer goods.
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roundabout production
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The separation of work required to produce a product into a number of tasks.
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division of labor
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Resulting from division of labor, it occurs when a worker is assigned to a single task and becomes proficient in it.
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specialization
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The function of money that allows goods and services to be traded for it.
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medium of exchange
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The practice of swapping goods for goods (ex: trade wheat for oranges).
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barter
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It is total revenue - total cost ; also known as pure profit, it is total revenue from a sale after the entrepreneur has been rewarded.
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Economic profit
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It is the profit earned by the entrepreneur.
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Normal profit
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An industry that is earning economic profit.
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expanding industry
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An industry that is unprofitable.
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declining industry
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The concept in the market economy in which the consumer is the ultimate "ruler" in the marketplace.
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consumer sovereignty
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Demand for a resource created by the demand for the goods and services it helps produce.
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derived demand
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The "father" of classical economics, author of THE WEALTH OF NATIONS.
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Adam Smith
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The combined forces of self-interest and competition working within the free market, guiding resources to where they do the most good for society.
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the invisible hand
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The way in which the WRIP earned by the nation is distributed among the factors of production.
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Functional distribution of income
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The way in which the nation's money income is divided among the nation's households.
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Personal distribution of income.
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The part of after-tax income that is not spent.
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saving
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Products that have expected lives of 3 years or more.
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durable goods
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Products that have expected lives of less than three years.
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nondurable goods
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A factory, mine, store, or warehouse
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plant
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A business organization that owns and operates plants.
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firm
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A group of firms that produce the same (or similar) products
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industry
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A business owned and operated by one person.
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sole proprietorhship
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A business owned and operated by two or more people.
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partnership
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A business owned by stockholders and run by a Board of Directors.
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corporation
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Complete responsibility for all business debts; a disadvantage for sole proprietorships and partnerships.
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unlimited liability
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An owner is responsible for only the amount of money invested.
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limited liability
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Shares of ownership in a corporation.
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stocks
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A promise to repay a loan.
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bond
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A disadvantage of a corporation ; refers to the taxes paid by both the corporation and the shareholders .
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double taxation
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The dilemma in which the wishes of the owners of a corporation (stockholders) may not coincide with the wishes of the managers.
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principal-agent problem
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A situation in which a single seller controls an industry; in a market system, this is typically illegal.
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monopoly
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A situation in which an uninvolved third party is helped or hurt by an economic activity.
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spillover or externality
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It is a positive externality; an uninvolved third party benefits from an economic activity.
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spillover benefit
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It is a negative externality; an uninvolved third party is hurt by an economic activity.
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spillover cost
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Private goods are subject to this principle, which means that only people that can pay the price for the good may acquire it.
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exclusion principle
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These goods are indivisible; they are available to all whether parties help pay for them or not; the product units are too large to to be sold to individuals.
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public goods
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The problem that results when people receive benefits from a good without helping pay its cost.
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free-rider problem
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Goods provided by the government that could be (and sometimes are) provided privately.
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quasi-public goods
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They are the three main types of business organizations in the US
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sole proprietorships, partnerships, corporations
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It is a business owned and operated by one person
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sole proprietorship
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It is a business owned and operated by two or more people; can me "general" or "limited"
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partnership
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It is a business owned by stockholders and run by a board of directors; must be chartered by the state or local governments
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corporation
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It is the most common form of business in the US
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sole proprietorship
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This type of business receives the majority of profits
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corporation
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It is legal responsibility for all business debts; it is a disadvantage of the sole proprietorship and the general partnership
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unlimited liability
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The owner is only responsible for the amount of investment in a company; it is an advantage of the corporation
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limited liability
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When the owner dies or leaves the company, the business dies/ends as well; it is a disadvantage of the sole proprietorship and partnership
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limited life
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If the owner dies or sells his share of the business, the company is typically unaffected and continues to operate; it is an advantage of the corporation
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unlimited life
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A situation in which the corporation is taxed twice, once on its corporate profits and again on shareholder dividends; it is a disadvantage of the corporation
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double taxation
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This form of business is legal entity, with the rights and responsibilities of a person.
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corporation
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They own the corporation
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stockholders/shareholders
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They run the corporation
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Board of Directors
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It is a combination of two or more businesses to create a new, larger business
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merger
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It is a merger of companies that produce the same product; EX : two banks merge
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horizontal merger
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It is merger of companies that produce different steps in the production process
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vertical merger
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It is merger of four more unrelated types of business
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conglomerate
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It is a corporation that has production or financial operations in more than one country
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multinational
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This market structure is characterized by a large number of independent buyers and sellers who exchange identical products; are free to enter/exit the market freely
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perfect competition
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This market structure has all the characteristics of perfect competition except that the products are differentiated; it is mostly where you shop
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monopolistic competition
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It is a market structure with a few (3-5) very large businesses
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oligopoly
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It is a market structure with one producer of a good or service; it rarely exists in the market system
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monopoly
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It is the oldest and largest stock market in the country
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NYSE (New York Stock Exchange)
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It is an index that reflects how the stock market as whole performed on a daily basis
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Dow Jones Industrial Average
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This government commission regulates the trading of securities (stocks and bonds)
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SEC (Securities and Exchange Commission)
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This animal represents a growing market in which prices are rising
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bull market
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This animal represents a market in which prices are dropping because owners are selling their stock
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bear market
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It is a stockholder's share of company profits, typically paid quarterly
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dividend
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It is the total dollar value of all final goods and services produced in our country's borders within a given time
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GROSS DOMESTIC PRODUCT (GDP)
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It is the formula for the expenditure model of GDP
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Consumption + Investment + Government + Net exports C+I+G+(X-M)
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These categories are excluded from GDP accounting
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public and private transfer payments, stocks and bonds, non-market transactions, secondhand sales, intermediate products
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It is GDP that has not been adjusted for inflation
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current or nominal GDP
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It is GDP that has been adjusted for inflation
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real GDP
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In national income accounting, it is the largest accounting category for the US
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GDP
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It is the market value of all goods and services produced by Americans anywhere in the world
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Gross National Product (GNP)
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In national income accounting, it is the smallest measure of income
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disposable income
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This price index is used to remove inflation from nominal GDP
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GDP price deflator
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It is the formula for deflating GDP/calculating real GDP
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(nominal GDP/GDP deflator) x 100
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To calculate REAL numbers, this must be removed from CURRENT numbers
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inflation
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This price index calculates inflation as it applies to consumer goods and services
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Consumer Price Index (CPI)
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This price index calculate inflation as it applies to producer costs
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Producer Price Index (PPI)
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It is the forumlate o calcuate the rate of inflation from one year to another
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(New CPI-Old CPI)/(Old CPI) x 100
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It is the formula for calculating the labor force
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employed + unemployed = labor force
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It is the formula for calculating unemployment
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Unemployed people/total # of people in labor force x 100
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It is the formula for calculating the labor force participation rate
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#of people in labor force/total #of people 16 and over
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This rule allows us to approximate how long it will take a measure to double with a given rate of growth
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The Rule of 70 70/growth rate
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This term refers to alternating rises and declines in real GDP
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the business cycle
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They are the two main phases of the business cycle
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Recession and Expansion
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During recession, it is the biggest threat to the economy
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unemployment
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During expansion, it is the biggest threat to the economy
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inflation
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It is the point where GDP stops increasing
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peak
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It is the point where GDP stops declining
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Trough
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During a recession, production of these goods is hit hardest
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durable goods
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It is positive unemployment, sometimes temporary or by choice
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frictional
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It is unemployment in which job seekers and job vacancies do not match; comes from a fundamental change in economic activity; sometimes technological
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structural
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It is unemployment related to recession
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cyclical
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It is the formula for the natural rate of unemployment (NRU)
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structural + frictional = NRU
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It is the range for the natural rate of unemployment in the US
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4-6%
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It relates the amount by which actual unemployment exceeds the natural rate to the GDP gap
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Okuns Law
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Okun's Law states that for every 1% that the actual rate of unemployment exceeds the natural rate, this GDP gap exists
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2%
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Demographically, these groups are hit hardest by unemployment
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teenagers, men, low-skilled workers, lower education levels
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It is a rise in the general level of prices
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inflation
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It is inflation caused by consumption spending; too many dollars chasing not enough products
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demand-pull
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It is inflation caused by rising production costs
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cost-push inflation
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It is inflation in excess of 50% a year; usually precedes an economic collapse
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hyperinflation
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It is income received as WRIP
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nominal income
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It is income adjusted for inflation
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real income
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They are most hurt by inflation
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creditors, fixed-income receivers,savers
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They actually benefit from inflation
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flexible-income receivers, debtors
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It is the formula for calculating the real interest rate
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nominal rate - inflation rate
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It is inflation during a recession; it is very unusual but arose during the late 1970s
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stagflation (stagnant economy + inflation)
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It is the formula for the spending multiplier.
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1/MPS
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It is the formula for the tax multiplier
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-MPC/MPS
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It is always the value of the balanced budget multiplier
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1 When an increase in spending is matched by an equal increase in taxes, the value of the increase is the amount of the government spending increase, because the multiplied effect is offset by the tax multiplier.)
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It is the practical significance of the spending multiplier
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Relatively small changes in spending are magnified into larger changes in GDP
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The are the determinants of aggregate demand.
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Consumption, Investment, Government Spending, and Net Exports
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Give three examples of injections into the circular flow of the economy.
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exports, government spending, investment spending
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Give three examples of leakages from the circular flow of the economy
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taxes, imports, savings
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It is the formula for determining the real interest rate.
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Nominal interest rate-inflation rate =real interest rate
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It is the effect of a strong (appreciating) currency on imports and exports.
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A strong currency makes exports more expensive, thus decreasing them. It makes imports less expensive, thus increasing them.(SID: Strong dollar/ Imports increase /trade Deficit)
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It is the effect of a weak (depreciating) currency on imports and exports.
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A weak currency makes exports less expensive, thus increasing them. It makes imports more expensive, thus decreasing them (WES : Weak dollar/Exports increase/trade Surplus)
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They are the reasons for the downward sloping aggregate demand curve.
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1.Real balances (wealth) effect 2. Interest rate effect 3. foreign purchases effect
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It is the relationship shown in the AGGREGATE DEMAND CURVE
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The INVERSE relationship between price level and real GDP/output
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It is the relationship shown in the AGGREGATE SUPPLY CURVE
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The direct relationship between price level and real GDP/output
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It is the state of the economy in the horizontal range of aggregate supply
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recession
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It is the state of the economy in the upsloping/intermediate range of aggregate supply
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expansion
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It is the state of the economy in the vertical range of aggregate supply
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full employment
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Which would increase GDP by the greatest amount: a $100 million increase in government spending, or a $100 million decrease in lump sum taxes?
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$100 spending increase, because the spending multiplier is greater than the tax multiplier
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They are the shifters/determinants of aggregate supply
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Input prices, productivity, and the legal/institutional environment
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It is the formula for productivity
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total output/total inputs (In other words, how much we get out of what we put in)
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It is the effect of a tax cut on aggregate supply
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Taxes decrease, aggregate supply increases (and vice versa)
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It is the effect of deregulation of an industry on aggregate supply
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Deregulation = an increase in aggregate supply
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It is the ability of a firm to set its price(above a competitive rate)
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monopoly power/market power
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It occurs when aggregate demand increases when GDP is at full employment
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demand-pull inflation
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It is the term for inflation during a recession (stagnant economy)
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stagflation
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These two government bodies carry out fiscal policy
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Congress and the President
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Fiscal policy that seeks to expand/increase real GDP
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expansionary policy
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Fiscal policy that seeks to fight inflation during an expansion
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contractionary policy
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They are the two tools of fiscal policy
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taxing and spending
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This budget situation occurs during expansionary policy (revenues down, spending up)
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budget deficit
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This budget situation occurs during contractionary policy (revenues up, spending down)
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budget surplus
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Entitlement programs and our marginal progressive tax system are examples of this type of fiscal policy measure.
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automatic fiscal policy
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Specific government actions that increase or decrease taxes or spending measures are examples of this type of fiscal policy measure.
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discretionary fiscal policy
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This term refers to the possibility that politicians might manipulate the economy to enhance their chances of reelection
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political business cycle
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This term refers to higher than normal interest rates caused by heavy government borrowing that thus reduce investment spending
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crowding out effect
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They are three functions of money
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medium of exchange, measure of value, store of value
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When you are estimating your total expenses for college next year, you are using money as _____.
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a measure of value/standard of value/unit of account
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When you put your graduation gift money in a certificate of deposit for 6 months to earn interest, you are using money as ___
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a store of value
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When you use your first lottery winnings to buy Christmas gifts for your teachers, you are using money as ________
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a medium of exchange
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It is money in its narrowest definition---currency, coins, and demand deposits
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M1
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It is M1 + smaller time deposits
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M2
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It is M2 + large/institutional time deposits
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M3
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The US is on this type of monetary standard
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inconvertible fiat money standard
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It is money that has another use , such as cigarettes used for transactions in prison.
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commodity money
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What government entity issues our paper currency
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The Federal Reserve
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What government entity controls monetary policy in the US?
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The Federal Reserve
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She is the Chairman of the Federal Reserve
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Janet Yellen
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They are the three tools of monetary policy.
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Open market operations, the discount rate, and the reserve requirement
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When the Fed is concerned about a recession, what type of monetary policy will they pursue?
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expansionary policy
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As part of expansionary monetary policy, what options does the Fed have with its 3 primary tools?
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Buy securities/bonds; lower the discount rate, lower the reserve requirement
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As part of contractionary monetary policy, what options does the Fed have with its 3 primary tools?
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Sell securities/bonds, lower the discount rate, lower the reserve requirement
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This determines how much a bank may lend.
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Its excess reserves
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It is the formula for the money multiplier
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1/required reserve ratio
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It is the interest rate that the Fed charges member banks to borrow from it
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the discount rate
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It is the interest rate that banks charge each other to borrow money
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Federal Funds Rate
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It is the equation of exchange
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MV=PQ
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According to monetarist theory and the equation of exchange, what will happen to nominal GDP when the money supply increases?
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nominal GDP will increase
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On a bank's t-account, demand deposits will go under this category
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liabilities
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On a bank's t-account, loans will go under this category
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assets
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On a bank's t-account, the government securities that the bank owns will go under this category
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assets
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If our economy is experiencing both high unemployment and high inflation, which will the Fed address FIRST?
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inflation IT IS PUBLIC ENEMY #1
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When the money supply increases, interest rates will move in this direction?
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down
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If the Fed pursues a "tight money" or contractionary policy, interest rates will move in this direction
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up
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When the interest rate rises, bond values move in this direction.
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down **BOND VALUES AND INTEREST RATES MOVE IN OPPOSITE DIRECTIONS
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If the RRR is 10%, this is the value of the money multiplier.
answer
10
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The demand for money is driven by these three motives.
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Transactions motive, speculative motive, precautionary motive.
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Of the 3 motives for money demand, it is the motive to have cash to pay for goods and services.
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Transactions motive
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Of the 3 motives for money demand, it is the motive to hold cash to be prepared for cash-based investment opportunities such as bonds.
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Speculative motive
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Of the 3 motives for money demand, it is the motive to hold cash for unexpected expenses.
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precautionary motive
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On the money market graph, , this curve is vertical.
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Money supply
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On the money market graph, it is on the vertical axis.
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interest rate
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It is the formula for determining a bank's excess reserves from a deposit.
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Deposit - reserve requirement
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It is the formula for determining the maximum change in loans from a deposit
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excess reserves x money multiplier
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It is the formula for determining the maximum change in the money supply from a deposit
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change in loans + amount of original deposit
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It is money by government decree; it has value because the government deems it so
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fiat
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It is the cost of holding money (not saving it or investing it)
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the interest that it could earn
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Industries/businesses most likely to be impacted by changes in monetary policy
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those that produce goodsand services that are interest-sensitive (usually purchased with a loan), such as durable goods such as homes and cars or services such as higher education
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What actions are taken as part of FISCAL POLICY?
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tax increases/decreases;spending increases/decreases
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Who is charge of FISCAL POLICY?
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Congress and the President
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Does the Fed set tax rates?
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NOOOOOOOOOOOOO
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absolute advantage
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the ability to produce more of a good than another country
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comparative advantage
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the ability to produce a good at a lower opportunity cost than another country
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appreciation
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increase in the value of a currency relative to another currency
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depreciation
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decrease in the value of a currency relative to another currency
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WES
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WEAK dollar > EXPORT more >move to a trade SURPLUS
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SID
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STRONG dollar > IMPORT more > move to a trade DEFICIT
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dumping
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sale of products in a foreign country at prices either below costs or below prices at home
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exchange rate
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rates at which currencies trade for one another
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nontarrif barriers
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all impediments other than protective tariffs that nations establish to impede imports, including quotas, licensing requirements, unreasonable product quality standards, etc.
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North American Free Trade Agreement
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1993 agreement establishing a free trade zone composed of Canada, Mexico, and the US
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offshoring
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practice of shifting work previously done by American workers to workers located in other nations
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Smoot-Hawley Tariff Act
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legislation passed in 1930 that established very high US tariffs designed to reduce imports and stimulate the domestic economy. Instead, the law only resulted in retaliatory tariffs by other nations and decline in trade worldwide.
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tariffs
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taxes imposed by a nation on imported goods
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terms of trade
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rate at which units by one product can be exchanged for units of another product
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trade bloc
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group of nations that lower or abolish trade barriers among themselves
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World Trade Organization
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organization of 153 nations that overses the provisions of the current world trade agreement, resolves disputes stemming from it, and hold forums for further rounds of trade negotiations
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Current Account
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in the balance of trade accounting system, this includes imports and exports of goods and services, investment income, and transfers.
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Capital/Financial Account
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in the balance of trade accounting system, this includes real and financial assets
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Official Reserves
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in the balance of trade accounting system, the central bank holds reserves of foreign currencies to offset deficits and surpluses
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