188 terms

AP Macro Exam Vocab


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