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AP Econ vocab
vocab for ap exam for macro econ
Terms in this set (191)
The ability to produce more of a good than all other producers.
Absolute prices (money)
The price of a good measured in units of currency.
aggregate demand curve
the negative relationship between all spending on domestic output and the average price level of that output.
the sum of all income earned by suppliers of resources in the economy.
aggregate spending (GDP)
the sum of all spending from four sectors of the economy.
Aggregate supply curve
the positive relationship between the level of domestic output produced and the average price level of that output.
all else equal
the assumption that all other variables are held constant so that we can predict how a change in one variable affects a second.
production of the combination of goods and services that provides the most net benefit to society. This is achieved when the MB (marginal benefit) = MC (marginal cost) of the next unit.
an increase in the price of one currency relative to another currency.
Assets of a bank
anything owned by the bank or owed to the bank
fiscal policy mechanisms that automatically regulate, or stabilize, the macro economy as it moves through the business cycle.
the amount of consumption that occurs no matter the level of disposable income.
the level of investment determined by investment demand and independent of GDP.
the amount of saving that occurs no matter the level of disposable income.
a change in government spending offset by an equal change in taxes results in a multiplier effect equal to one.
balance of payments statement.
a summary of the payments received by the U.S. from foreign countries and the payments sent by the U.S. to foreign countries.
balance sheet or T-acount
a tabular way to show a banks assets and liabilities.
base (or reference) year
the year that serves as a reference point for constructing a price index and comparing real values over time.
a certificate of indebtedness from the issuer to the bond holder.
exists if government spending exceeds the tax revenue collected.
exists if tax revenue collected exceeds government spending
the periodic rise and fall in economic activity around its long-term growth trend.
capital (or financial) account
this account shows the flow of investment on real or financial assets between a nation and foreigners.
circular flow of economic activity (or circular flow of goods and services)
a model that shows how households and firms circulate resources, goods, and incomes through the economy. This basic model is expanded to include the government and the foreign sector.
a macroeconomic model that explains how the economy naturally tends to come to full employment in the long run.
a model assuming no foreign sector (imports and exports.
the ability to produce a good at lower opportunity cost than all other producers
two goods that provide more utility when consumed together than when consumed separately.
consumer price index (CPI)
The price index that measures the average price level of the items in the base year market basket. This is the main measure of consumer inflation.
the difference between a buyer's willingness to pay and the price actually paid.
consumption and saving schedules
tables that show the direct relationships between disposable income and consumption and saving.
a positive relationship between disposable income and consumption.
a period where real GDP is falling.
contractionary fiscal policy
lower government spending or higher net taxes to shift AD to the left to full employment and reduce inflationary pressures.
contractionary monetary policy
designed to avoid inflation by decreasing aggregate demand, which lowers the price level and decreases real GDP back to full employment
crowding out effect
increased government deficits leads to increased borrowing, which leads to increased demand for money, which drives up the interest rate (the price to borrow money). This increase in interest rate crowds out private investment.
This account shows current import and export payments of both goods and services and investment income sent to foreign investors and investment income received by U.S. citizens who invest abroad.
a firms way of raising investment funds by issuing bonds to the public.
a type of unemployment that rises and falls with the business cycle. this form of unemployment is felt economy-wide.
decision to invest
a firm invests in projects if the expected rate of return is at least as great as the real interest rate.
a decline in the overall price level.
shows the quantity of a good demanded at all prices.
demand for loanable funds
the negative relationship between the real interest rate and the dollars invested by firms.
inflation that results from strong AD as it increases in the upward sloping range of AS.
a table showing quantity of currency relative to another currency.
a decrease in the price of one currency relative to another currency.
a prolonged deep trough in the business cycle.
Determinants of Aggregate Demand
1.Changes in input prices
a)(land, labor capital, entrepreneurial ability),
b) prices of imported resources
c) market power (the ability to set prices above the price that would occur in a competitive situation)
2. Changes in productivity
3. Changes in legal institutional environment
a) business taxes and subsidies
b) government regulations
Determinants of Aggregate Supply
4. net exports.
Determinants of demand
the external factors that shift demand to the left or right. which includes:
1. buyers tastes,
2. # of buyers,
3. change in income,
4. change in price of substitutes and compliments,
5. change in expectations.
determinants of supply
the external factors that influence supply. When these variables change, the entire supply curve shifts to the left or right. Which includes:
1. change in resource price,
2. change in technology,
3. change in taxes/subsidies,
4. change in price of other goods,
5. change in expectations,
6. change in number of suppliers,
7. change in productivity.
the interest rate commercial banks pay on short-term loans from the fed.
citizens who have been without work for so long that they become tired of looking for work and drop out of the labor force. because these citizens are not counted in the ranks of the unemployed, the reported unemployment rate is understated.
any price where the quantity demanded does not equal the quantity supplied.
disposable income (DI)
the income a consumer has to spend or save once they have paid out net taxes.
another way of saying that saving is less than zero.
the equilibrium price of a good in a nation without trade
the mistake of including the value of intermediate stages of production in GDP on top of the value of the final good.
the increase in an economy's production possibilities frontier (PPF)
the study of how society allocates scarce resources
the measurement of the sensitivity, or responsiveness, to price changes
a person that has worked for pay at least one hour per week.
equation of exchange
the equation says that nominal GDP (Price x Quantity) is equal to the quantity of money (M) multiplied by the number of times each dollar is spent in a year.
the firms method of raising funds for investment by issuing shares of stock to the public.
the portion of a deposit that may be loaned to borrowers.
a per unit tax on a specific good or service.
a period where real GDP is growing.
expansionary fiscal policy
increases in government spending or lower net taxes meant to shift AD to the right toward full employment and lower the unemployment rate.
expansionary monetary policy
designed to fix a recession and increase aggregate demand, lower the unemployment rate, and increase real GDP, which may increase the price level
expected rate of return
the rate of profit the firm anticipates receiving on investment expenditures.
goods and services produced domestically but sold abroad.
factors of production
inputs or resources that go into the production function to produce goods and services
federal funds rate
the interest rate paid on short-term loans made from one bank to another. When this rate is a target for an OMO, bonds are bought or sold accordingly until the interest rate target has been met.
paper and coin money with no intrinsic value but used to make transactions because the government declares it to be legal tender.
goods that are ready for their final use by consumers and firms
deliberate changes in government spending and net tax collection to affect economic output, unemployment and the price level.
fractional reserve banking
a system in which only a fraction of the total money deposited in banks is held in reserve
a type of unemployment that occurs when someone new enters the labor market or switches jobs. this is a relatively harmless form of unemployment and not expected to last long.
exists when the economy is experiencing no cyclical unemployment
functions of money
money serves as a medium of exchange, a unit of account and a store of value
if r is the current interest rate, the future value of $1 invested today for a period of one year is $1*(1+r)
Gross Domestic Product (GDP)
the market value of the final goods and services produced within a nation in a given period of time
GDP price deflator
the price index that measures the average price level of goods and services that make up GDP
the amount of knowledge and skills that labor can apply to the work that they do.
goods produced abroad but consumed domestically
a limitation on the amount of a good that can be imported into the domestic market
due to a higher price, the change in quantity demanded that results from a change in the consumers purchasing power (or real income).
a good for which demand decreases with an increase in consumer income.
an increase in the overall price level
the amount by which equilibrium real GDP exceeds full employment GDP
interest rate effect
the process of reduced domestic consumption due to a higher price level causing an increase in the real interest rate
goods that require further modification before they are ready for their final use.
the negative relationship between the real interest rate and the cumulative dollars invested.
investment tax credit
a reduction in taxes for firms that invest in new capital like a factory or piece of equipment.
a macroeconomic model that believes the economy is unstable and does not naturally move to full employment in the long run
the sum of all individuals 16 years and older who are either currently employed or unemployed. LF=E + U
law of demand
all else equal, when the price of a good rises, the quantity demanded of that good falls
law of diminishing marginal utility
in a given time period, as consumption of an item increases, the marginal (additional) utility from that item falls.
law of diminishing marginal returns
as successive units of a variable input are added to a fixed input, beyond some point the marginal product declines
law of increasing costs
as more of a good is produced the greater is its opportunity (or marginal) cost.
Law of increasing marginal cost
as a producer produces more of a good, the marginal cost rise.
law of supply
all else equal, when the price of a good rises, the quantity supplied of that good rises
liability of a bank
anything owned by a depositors or lenders to the bank
a measure of how easily an asset can be converted to cash.
the most liquid measure of money supply, including cash, checking deposits and travelers checks.
M1 plus savings deposits, small time deposits and money market and mutual funds balances
M2 plus large time deposits
macroeconomic long run
a period of time long enough for input prices to have fully adjusted to market forces, all input and output markets are in equilibrium and the economy is operating at full employment
macroeconomic short run
a period of time during which the prices of goods and services are changing in their respective markets but the input prices have not yet adjusted to those changes in the product markets.
the next unit, or increment of, an action.
making decisions based upon weighing the marginal benefits and costs of that action. the rational decision-maker chooses an action if the MB is greater than or equal to MC.
marginal benefit (MB)
the additional benefit received from the consumption of the next unit of a good or service.
marginal cost (MC)
the additional cost of producing one more unit of output
marginal propensity to consume (MPC)
the change in consumption caused by a change in disposable income. The slope of the consumption function.
Marginal propensity to save (MPS)
the change in saving caused by a change in disposable income. the slope of the saving function.
a collection of goods and services used to represent what is consumed in the economy
an economic system in which resources are allocated through the decentralized decisions of firms and consumers
exists at the only price where the quantity supplied equals the quantity demanded. Or, it is the only quantity where the price consumers are willing to pay is exactly the price producers are willing to accept.
the negative relationship between the nominal interest rate and the quantity of money demanded as an asset plus the quantity of money demanded for transactions.
equal to one over the reserve ration, this measures the maximum amount of new checking deposits that can be created by a single dollar of excess reserves
the fixed quantity of money in circulation at a given point in time as measured by the central bank.
the idea that a change in any component of aggregate demand creates a larger change in GDP
net export effect
the process of how expansionary fiscal policy decreases net exports due to rising interest rates. another form of crowding out.
the value of current production at the current prices
todays income, in todays dollars. These are dollars unadjusted by inflation.
household work or do-it-yourself jobs that are missed by GDP accounting
natural resources that cannot replenish themselves
a good for which demand increases with an increase in consumer income
official reserves account
the Fed's adjustment of a deficit or surplus in the current and capital account by the addition or subtraction of foreign currencies so that the balance of payments is zero.
open market operation
a tool of monetary policy, it involves the feds buying (or selling( of treasury bonds from (or to( commercial banks and the general public.
the value of the sacrifice made to pursue a course of action
out of labor force
a person is that has chosen not to seek employment.
the top of the business cycle where an expansion has ended and is about to turn down
if r is the current interest rate, the present value of $1 received one year from now is $1*(1+r)
a legal maximum price, above which the product cannot be sold
a legal minimum price, below which the product cannot be sold
a measure of the average level of prices in a market basket for a given year, when compared to the prices in a reference (or base) year.
the difference between the price received and the marginal cost of producing the good.
production of a maximum output for a given level of technology and resources
the different quantities of goods that an economy can produce with a given amount of scarce resources
production possibilities frontier (PPF)
the graphical device used to show the production possibilities of two goods
production possibilities curve (PPC)
a graphical device that show the combination of two goods that a nation can efficiently produce with available resources and technology
the quantity of output that can be produced per worker in a given amount of time
an excise tax levied on an imported good that is produced in the domestic market so that it may be protected from foreign competition
quantity theory of money
the theory that an increase in the money supply will not affect real output and will only result in higher prices
the value of current production, but using prices from a fixed point in time
todays' income measured in base year dollars. These inflation-adjusted dollars can be compared from year to year to determine whether purchasing power has increased or decreased.
real rate of interest
the cost of borrowing to fund an investment and equal to the nominal interest rate minus the expected rate of inflation
two or more consecutive quarters of falling real GDP
the amount by which full employment GDP exceeds equilibrium real GDP.
the price of one unit of good X measured not in currency, but in the number of units of good Y that must be sacrificed to acquire good X.
natural resources that can replenish themselves if they are not over harvested
the minimum amount of deposits that must be held at the bank for withdrawals
the fraction of total deposits that must be kept on reserve
also called factors of production, these are commonly grouped into the four categories of land, labor, capital, and entrepreneurship
an excise tax levied on goods that are not produced in the domestic market
a positive relationship between disposable income and saving
the imbalance between limited productive resources and unlimited human wants.
a type of unemployment that is periodic, predictable, and that follows the calendar. workers and employers alike anticipate these changes in unemployment and plan to follow accordingly, thus the damage is minimal.
final goods and services that are resold
a situation in which, at the going market price, the quantity demanded exceeds the quantity supplied.
production of goods, or performance of tasks, based upon comparative advantage.
the amount by which real GDP changes due to a change in spending
when inflation and the unemployment rate are both increasing. also called cost-push inflation.
the case when price levels do not change, especially downward, with changes in AD
a certificate that represents a claim to, or share of, the ownership of a firm.
a type of unemployment that is the result of fundamental, underlying changes in the economy such that some job skills are no longer in demand.
two goods are this if they provide essentially the same utility to the consumer.
the change in quantity demanded resulting from a change in the price of one good relative to the price of other goods.
shows the quantity of a good supplied at all prices
supply of loanable funds
the positive relationship between the dollars saved and the real interest rate.
a table showing quantity supplied for a good at various quantities
an economy-wide phenomenon that affects the costs of firms and results in a shifting AS curve
when the AS curve shifts outward and AD curve stays constant, the price level falls, real GDP increases and the unemployment rate falls.
supply-side fiscal policy
fiscal policy centered on incentives to save and invest to prompt economic growth with very little inflation
a situation in which, at the going market price, the quantity supplied exceeds the quantity demanded
the magnitude of the effect that a change in lump sum taxes has on real GDP
a nations knowledge of how to produce goods in the best possible way
theory of liquidity preference
keynes theory that the interest rate adjusts to bring the money market into equilibrium
the sum of consumer surplus and producer surplus
the reality of scarce resources implies that individuals, firms, and governments are constantly faced with difficult choices that involve benefits and costs
the amount of money held in order to make transaction
the unreported or illegal activity, bartering or informal exchange of cash for goods and services that are not reported in official tabulations of GDP
a person that is not currently working but is actively seeking work.
Happiness, or benefit, or satisfaction, or enjoyment gained from consumption of goods and services
velocity of money
the average number of times that a dollar is spent in a year
as the average price level rises, the purchasing power of wealth and savings begins to fall. higher prices therefore tend to reduce the quantity of domestic output purchased.
the global equilibrium price of a good when nations engage in trade.
when demand is inelastic, total revenue (and expenditure) moves in the same direction as the change in price
percentage change in quantity of a product demanded is the same as the percentage change in price in absolute value (a demand elasticity of 1)