AP Macroeconomics Exam

aggregate demand curve
a curve depicting the relationship between real GDP demanded (i.e., expenditures) and the price level in the economy; the aggregate demand curve slopes downward from left to right.

aggregate supply curve
a curve defining the relationship between real production and price level.

business cycles
fluctuations in real GDP around the trend value; also called economic fluctuations.

consumer surplus
the difference between the maximum price a consume is (or would be) willing to pay and the price he or she actually pays.

cost-push inflation
inflation created when an increase in the costs of production (wages or raw materials) shifts the short-run aggregate supply (AS) curve to the left; tends to push prices up while reducing the level of real GDP at the same time (stagflation).

cyclical unemployment
unemployment that reflects changes in the business cycle; the difference between the official unemployment rate & the natural rate of unemployment.

demand-pull inflation
inflation that follows from an increase in aggregate demand, which will cause equilibrium real GDP (Y) to increase and the equilibrium price level (P) to increase.

when the price of one currency falls relative to another currency, the first currency has depreciated relative to the other one.

period in which a recession becomes prolonged and deep, involving high unemployment.

significantly responsive to a change in price.

exchange rate
the price of a domestic currency in terms of a foreign currency.

period in which the economy moves from a trough to a peak and a real GDP is increasing; also called a boom.

expansionary fiscal policy
enacted when the government deliberately increases its deficit to stimulate the economy; the government increases its spending (increases G), cuts taxes (decreases T), or both, and stimulates the economy by expanding aggregate demand (AD).

expansionary monetary policy
monetary policy methods by which the Fed aims to increase the money supply and lower interest rates, thereby creating an increase in output; in pursuit of expansionary policy goals, the Fed can lower the required reserve ratio, lower the discount rate, or purchase government securities on the open market.

expenditure approach
a way of measuring the GDP by adding up all spending on final goods and services during a given year.

fiscal policy
changes, adjustments, and strategies that the governments implements in spending or taxation to achieve particular economic goals.

frictional unemployment
unemployment faced by workers who have lost their jobs because of changing market (demand) conditions & who have transferable skills; unemployment due to the natural frictions of the economy.

Gross Domestic Product
the dollar value of production within a nation’s border.

Gross National Product
the dollar value of production by a country’s citizens.

a very high rate of inflation, under which prices go up very rapidly, often more than 1,000 percent in a year. This causes money to become a poor store of value.

import quotas
restrictions on the quantity of a good that can be imported

not significantly responsive to changes in price.

inferior good
a good for which there is less demand as income rises; a good the demand for which falls as income rises and rises as income falls; consumer income rises while demand decreases.

an increase in the price level

the payment that capital receives in the factor market.

labor force
the group of individuals who are either working or actively looking for work; the labor force includes the unemployed: labor force = number of individuals in labor force/number of individuals in the adult population, expressed as a percentage.

law of demand
states that as prices rise, people are willing and able to buy less of a good and, hence, the quantity demanded decreases; as prices fall, people are willing and able to buy more, so the quantity demanded increases and the demand curve slopes downwards.

law of supply
states that as the price of a good increases, the quantity supplied of a good increases, and as the price of a good decreases, the quantity supplied of the good decreases.

LRAS curve
long- run aggregate supply curve

marginal propensity to consume (MPC)
the proportion of each additional dollar of income that will go toward consumption expenditures.

Marginal Propensity to Save (MPS)
the proportion of each additional dollar of income that is saved.

marginal revenue
the addition to total revenue created by selling one additional unit of ouput.

market demand curve
the sum of each individual consumer’s demand curves for a certain good in a market (e.g., all the individual quantities of Good B demanded at each price).

market equilibrium
occurs when supply and demand are balanced such that the market price and the quantity exchanged are under no market pressure to change.

market supply curve
the sum of all the quantities of a good supplies by all producers at each price.

monetary policy
the deliberate control of the money supply by the Federal government.

money multiplier
economic tool used to determine exactly the amount of the new demand deposits that can be created from an initial deposit.

an industry structure in which there is only one seller for a product.

movement along a demand curve
movement up or down a single demand curve, contrasted with movement of the demand curve itself.

nominal GDP
the gross domestic product calculated using current-year prices; for example, the nominal GDP for 2001 would calculate the value of production using2001 prices for goods and services. Nominal GDP can vary widely from year to year, due to forces such as inflation.

a market with only a few sellers, each offering a product that is largely the same as the others’ products; in an oligopoly, there is always a tension between cooperation and competition.

opportunity cost
the cost of something in terms of what one must give up to get it.

the highest point of a business cycle.

Phillips curve
graphic representation of an inverse relationship between wage growth (percentage change in price level, such as inflation) and unemployment.

price ceiling
price control set when the market price is believed to be too high.

price floor
price control set when the market price is believed to be too low.

quantity exchanged
the amount of a good actually sold.

real GDP
nominal GDP corrected for inflation; real GDP is calculated using prices from a given base year, which may not be the same as the year being measured or the year in which the calculations are made. Real GDP allows economists to compare changes in production realistically across years, creating a stable price index so that rising prices in general do not increase real GDP.

required reserve ratio (RRR)
a specific percentage of checking account deposits that each bank must keep in liquid, zero-interest reserves; this amount is set by the Fed.

rule of 70
mathematical approximation used to measure the effect of economic growth; this rule tells us the approximate number of years it will take for some measure (real GDP, price level, savings account, etc.) to double given a known annual percentage increase.

the conflict between limited resources and unlimited human wants; the basic economic problem facing all societies.

simple money multiplier
1/RRR, where RRR is the required reserve ratio expressed as a decimal; if the required reserve ratio is 10% (0.1), the money multiplier is 1/0.1 = 10.

SRAS curve
short-run aggregate supply curve

a type of inflation that occurs when an economy’s output (real GDP decreases and its price level rises; production stagnates (as during a recession) while prices (and unemployment) go up.

structural unemployment
unemployment faced by workers who have lost their jobs because of changing market (demand) conditions & whose skills don’t match the requirements of available jobs.

a special tax imposed on imported goods.

trade deficit
a country has a trade deficit if the value of its commodity imports exceeds the value of its commodity exports.

trade surplus
a country has a trade surplus if the value of its commodity exports exceeds the value of its commodity imports.

the lowest point of a business cycle

a civilian, non-institutionalized adult is considered to be unemployed when he or she does not have a job but is actively looking for one; unemployment figures reflect the number of individuals meeting this definition who are parts of the labor force.

unemployment rate
the percentage of the civilian labor force that is unemployed. The number of persons unemployed divided by the number of persons in the civilian labor force (expressed as a percentage).

price index
a measure of the price level, or the average level of prices.

hidden unemployment
a person who has been unemployed and searching for a job for so long, that they have given up on finding a job and therefore forfeit unemployment.

consumption expenditures
the dollar value of all the goods and services sold to house holds.

disposable personal income
the income of households after taxes have been paid

government expenditures
the dollar value of goods and services sold to governments.

investment expenditures
expeditions by businesses on plant and equipment and the change in business invention.

national income (NI)
the income earned by households and profits earned by firms after subtracting.

national economic accounts
a comprehensive group of statistics that measures various aspects of the economy’s performance.

net exports
exports minus imports.

business cycle
the long-run pattern of growth and recession.

the transition point between economic recession and recovery.

a period of slow economic growth, usually accompanied by rising unemployment; two consecutive quarters of declining output.

a bad depressingly prolonged recession in economic activity.

rising prices, across the board.

the willingness and ability of buyers to purchase a good or service.

law of demand
law stating that as a price of a good increases, the quantity demanded of the good decreases, and vice versa.

inverse relationship
a relationship between two factors in which the factors move in opposite directions. ex: price increases, then quantity decreases.

direct relationship
a relationship between two factors in which the factors move in the same direction.

demand schedule
a table showing quantities of a good demanded at varying prices; a table demonstrating the number of units of a good demanded at various points.

demand curve
the graphical representation of the law of demand. Shows the amount of a good buyers are willing and able to buy at various prices.

normal good
a good the demand for which rises as income rises and falls as income falls; consumer income rises and demand rises.

the study of scarcity and choice.

individual choice
decisions by individuals about what to do and what not to do.

market economy
decisions of individual producers and consumers determine what how and for whom to reduce. Minor Government interference. Economy is run by itself.

command economy
government officials make decisions about economy.

anything that can be used to produce something else

anything from the land and/or nature. Ex: minerals, timber, petroleum, cotton.

the effort of workers.

the efforts of entrepreneurs in organizing resources for production taking risk to create new enterprises and innovating to develop new product.

resource is unavailable in sufficient amounts to satisfy various ways society wants to use it.

opportunity cost
real cost of an item is its opportunity cost.

the branch of economics that deals with human behavior and choices as they relate to relatively small units–the individual, the business firm, a single market.

the branch of economics that deals with human behavior and choices as they relate to the entire economy.

economic aggregates
anything that shows the economy as a whole.

Ceteris Paribus
(sayr-iht-us pahr-ih-bos) a Latin phrase meaning “all things constant.”

purchasing power
the amount of money available to consumers to purchase goods and services.

substitution effect
when consumers substitute a similar, lower priced product for a product which is relatively more expensive.

diminishing marginal utility
a law stating that as an additional unit of a particular food is consumed the utility (satisfaction) gained decreases.

change in quantity demanded
a movement along the demand curve in response to a change in price, ceteris paribus; change in price means move along the demand curve; movement = money.

consumer good
an increase or decrease in consumer income will cause a shift in the Demand Curve.

demand curve shifts
will shift either to the left(decrease) in demand, or to the right(increase) in demand; shift is caused by a change in one of the non-price determinates for the good.

consumer income rise
results an increase in the demand for normal goods and a decrease in the demand for inferior goods.

neutral good
consumer income ↑↓, demand will ↑↓.

complimentary goods
goods that go together, if price ↑ the demand for both that good and complimentary good ↓.

susbtitute goods
goods that compete with one another. If the price for one goes up the demand for the other will go up.

changes in consumer expectations
a shift in the demand curve resulting from consumer expectations regarding future income or future price of Goods and Services.

number of composition of consumers
(population); then there is a shift in the demand curve resulting from and increase or decrease in market demand, as specific consumption related to demographics is concerned.

consumer taste and preferences
a shift of the demand curve resulting from a change in consumer taste and preferences.

elastic demand
when the percent of change in quantity demanded is greater than the percent of change in price; when there is a large change in the quantity of a good demanded, and a small change in price of the good.

inelastic demand
when the percent of change in the quantity demanded is less than then percent of change in price; when there is a small change in the quantity of a good demanded, and a large change in the price of the good.

unit elastic
when the percent of change in the quantity demanded equals the percent of change in price.

perfectly elastic
where the demand curve is horizontal, reflecting situation in which any change in price reduces quantity demanded to “0.” the result of a competitive market consumers will go elsewhere to purchase the product.

total revenue
total revenue (TR) price of a good multiplied by the number of units sold; TR = P*Q.

demand elasticity
can be measured by using TR as a gauge; a decrease in TR following an increase in Price = Elastic Demand.

When Price and TR move in opposite directions….. P↑/TR↓ or P↓/TR↑

a decrease in TR following an increase in price = elastic demand
When Price and TR move in opposite directions….. P↑/TR↓ or P↓/TR↑

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