AP MACRO REVIEW

Terms in this set (275)

society's virtually unlimted wants paired our scarce and limited resources create this problem

the "economizing problem"

usefulness or satisfaction

all natural, human, and manufactured items that go into the production of goods and services

economic resources

they are the four factors of production (AKA economic resources)

land, labor, capital, entrepreneurship

all gifts of nature

manufactured/manmade tools used in production

all human effort, physical and mental

the risktaker that combines land, labor, and capital in order to create a new product

income received by labor

income received by capital

income received by land

income received by entrepreneurs

use of all available resources

full employment

production of any particular mix of goods and services in the least costly way

productive efficiency

production of the particular mix of goods and services most wanted by society

allocative efficiency

products that satisfy our wants directly

products that satisfay our wants indirectly, by producing the goods and services we do want

a graph that shows the maximum combination of any two goods that a business or economy may produce at a given time

production possibilities curve

law that states that the more of a product that is produced, the greater its opportunity cost

THE LAW OF INCREASING OPPORTUNITY COSTS

"too little of a good thing"

"too much of a good thing"

an economic system characterized by producers and consumers acting in their own self-interest

market economy AKA capitalism AKA free enterprise

an economic system characterized by government control of resources ; all economic decisions made by government

command AKA communism AKA socialism

an economic system in which economic decisions are based on custom and religion

a model that shows the flow of resources, products, and money in our economy

circular flow model

In the circular flow model, they own/sell the factors of production and buy products

In the circular flow model, they sell products and buy the factors of production

firms/businesses

On the production possibilities curve, it is represented by a point outside the curve

currently unattainable

On the production possibilities curve, it is represented by a point inside the curve

inefficient (caused by recession, depression, disaster)

To achieve "full production" both of these must be achieved

allocative efficiency and productive efficiency

An economy can achieve the most rapid rate of growth if it focuses its resources on production of these

In any given situation, they are the choices you have (also labels on the PPC)

What you give up when you make a choice

opportunity cost

Statement that summarizes the concept of opportunity cost; implies that there is always a cost for any choice or activity

There is no such thing as a free lunch (TINSTAAFL)

the basic economic problem; it is a lack of needed or wanted resources relative to the demand for the resources.

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.

rational self-interest

individuals pursue actions that will enable them to achieve their greatest satisfaction

opportunity cost

what you give up when you make a choice

marginal analysis

comparisons of costs and benefits

theoretical economics

process of deriving theories and principles in order to interpret and generalize collected facts

economic principles

statements about economic behavior that enable prediction

ceteris paribus

other-things equal assumption; assumes that all other variables except those under immediate consideration are held constant

looks at specific economic units such as businesses and consumer behavior

study of the economy as a whole, such as total output, total employment, total income, etc.

fallacy of composition

a statement that is valid for an individual or part is not necessarily valid for the larger group or whole

post hoc fallacy

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

correleation v. causation

because two sets of date are associated does not mean that cause and effect are present

positive economics

states economics by facts,avoiding value judgements

normative economics

incorporates value judgements

It is the responsiveness to a price change, for either supply or demand.

A change in this causes a change in quantity demanded ( movement along the curve)

The market is in this state when QS=QD.

They are the determinants of demand, also known as ceteris paribus conditions; they cause a shift in the demand curve.

Taste, income, number of buyers, expectations, related goods.

This condition exists when QD>QS.

An increase in demand or supply will shift the curve in this direction.

This condition exists when QS>QD.

A decrease in demand or supply will shift the curve in this direction.

When demand increases (shifts right), both price and quantity will do this.

It states that as the price of a product increases, the quantity that producers are willing to supply increases.

the law of supply

When demand decreases (shifts left), both price and quantity will do this.

On a supply curve, it is the relationship between price and quantity supplied.

positive/direct

A change in this causes a change in the quantity supplied (movement along the supply curve).

When supply decreases (shifts left), what happens to price and quantity?

Price increases, quantity decreases

They are the determinants of supply.

Resources, other goods that may be produced with the resources, techonology,taxes,expectations of sellers, number of sellers, subsidies.

When supply increases, what happens to price and quantity?

Price decreases, quantity increases.

They are the characteristics of the market system.

economic freedom, voluntary exchange, private property, profit motive.

The production and use of capital goods to aid in the production of consumer goods.

roundabout production

The separation of work required to produce a product into a number of tasks.

division of labor

Resulting from division of labor, it occurs when a worker is assigned to a single task and becomes proficient in it.

The function of money that allows goods and services to be traded for it.

medium of exchange

The practice of swapping goods for goods (ex: trade wheat for oranges).

It is total revenue - total cost ; also known as pure profit, it is total revenue from a sale after the entrepreneur has been rewarded.

Economic profit

It is the profit earned by the entrepreneur.

An industry that is earning economic profit.

expanding industry

An industry that is unprofitable.

declining industry

The concept in the market economy in which the consumer is the ultimate "ruler" in the marketplace.

consumer sovereignty

Demand for a resource created by the demand for the goods and services it helps produce.

The "father" of classical economics, author of THE WEALTH OF NATIONS.

The combined forces of self-interest and competition working within the free market, guiding resources to where they do the most good for society.

the invisible hand

The way in which the WRIP earned by the nation is distributed among the factors of production.

Functional distribution of income

The way in which the nation's money income is divided among the nation's households.

Personal distribution of income.

The part of after-tax income that is not spent.

Products that have expected lives of 3 years or more.

Products that have expected lives of less than three years.

nondurable goods

A factory, mine, store, or warehouse

A business organization that owns and operates plants.

A group of firms that produce the same (or similar) products

A business owned and operated by one person.

sole proprietorhship

A business owned and operated by two or more people.

A business owned by stockholders and run by a Board of Directors.

Complete responsibility for all business debts; a disadvantage for sole proprietorships and partnerships.

unlimited liability

An owner is responsible for only the amount of money invested.

limited liability

Shares of ownership in a corporation.

A promise to repay a loan.

A disadvantage of a corporation ; refers to the taxes paid by both the corporation and the shareholders .

double taxation

The dilemma in which the wishes of the owners of a corporation (stockholders) may not coincide with the wishes of the managers.

principal-agent problem

A situation in which a single seller controls an industry; in a market system, this is typically illegal.

A situation in which an uninvolved third party is helped or hurt by an economic activity.

spillover or externality

It is a positive externality; an uninvolved third party benefits from an economic activity.

spillover benefit

It is a negative externality; an uninvolved third party is hurt by an economic activity.

Private goods are subject to this principle, which means that only people that can pay the price for the good may acquire it.

exclusion principle

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.

The problem that results when people receive benefits from a good without helping pay its cost.

free-rider problem

Goods provided by the government that could be (and sometimes are) provided privately.

quasi-public goods

They are the three main types of business organizations in the US

sole proprietorships, partnerships, corporations

It is a business owned and operated by one person

sole proprietorship

It is a business owned and operated by two or more people; can me "general" or "limited"

It is a business owned by stockholders and run by a board of directors; must be chartered by the state or local governments

It is the most common form of business in the US

sole proprietorship

This type of business receives the majority of profits

It is legal responsibility for all business debts; it is a disadvantage of the sole proprietorship and the general partnership

unlimited liability

The owner is only responsible for the amount of investment in a company; it is an advantage of the corporation

limited liability

When the owner dies or leaves the company, the business dies/ends as well; it is a disadvantage of the sole proprietorship and partnership

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

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

double taxation

This form of business is legal entity, with the rights and responsibilities of a person.

They own the corporation

stockholders/shareholders

They run the corporation

Board of Directors

It is a combination of two or more businesses to create a new, larger business

It is a merger of companies that produce the same product; EX : two banks merge

horizontal merger

It is merger of companies that produce different steps in the production process

vertical merger

It is merger of four more unrelated types of business

It is a corporation that has production or financial operations in more than one country

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

perfect competition

This market structure has all the characteristics of perfect competition except that the products are differentiated; it is mostly where you shop

monopolistic competition

It is a market structure with a few (3-5) very large businesses

It is a market structure with one producer of a good or service; it rarely exists in the market system

It is the oldest and largest stock market in the country

NYSE (New York Stock Exchange)

It is an index that reflects how the stock market as whole performed on a daily basis

Dow Jones Industrial Average

This government commission regulates the trading of securities (stocks and bonds)

SEC (Securities and Exchange Commission)

This animal represents a growing market in which prices are rising

This animal represents a market in which prices are dropping because owners are selling their stock

It is a stockholder's share of company profits, typically paid quarterly

It is the total dollar value of all final goods and services produced in our country's borders within a given time

GROSS DOMESTIC PRODUCT (GDP)

It is the formula for the expenditure model of GDP

Consumption + Investment + Government + Net exports C+I+G+(X-M)

These categories are excluded from GDP accounting

public and private transfer payments, stocks and bonds, non-market transactions, secondhand sales, intermediate products

It is GDP that has not been adjusted for inflation

current or nominal GDP

It is GDP that has been adjusted for inflation

In national income accounting, it is the largest accounting category for the US

It is the market value of all goods and services produced by Americans anywhere in the world

Gross National Product (GNP)

In national income accounting, it is the smallest measure of income

disposable income

This price index is used to remove inflation from nominal GDP

GDP price deflator

It is the formula for deflating GDP/calculating real GDP

(nominal GDP/GDP deflator) x 100

To calculate REAL numbers, this must be removed from CURRENT numbers

This price index calculates inflation as it applies to consumer goods and services

Consumer Price Index (CPI)

This price index calculate inflation as it applies to producer costs

Producer Price Index (PPI)

It is the forumlate o calcuate the rate of inflation from one year to another

(New CPI-Old CPI)/(Old CPI) x 100

It is the formula for calculating the labor force

employed + unemployed = labor force

It is the formula for calculating unemployment

Unemployed people/total # of people in labor force x 100

It is the formula for calculating the labor force participation rate

#of people in labor force/total #of people 16 and over

This rule allows us to approximate how long it will take a measure to double with a given rate of growth

The Rule of 70
70/growth rate

This term refers to alternating rises and declines in real GDP

the business cycle

They are the two main phases of the business cycle

Recession and Expansion

During recession, it is the biggest threat to the economy

During expansion, it is the biggest threat to the economy

It is the point where GDP stops increasing

It is the point where GDP stops declining

During a recession, production of these goods is hit hardest

It is positive unemployment, sometimes temporary or by choice

It is unemployment in which job seekers and job vacancies do not match; comes from a fundamental change in economic activity; sometimes technological

It is unemployment related to recession

It is the formula for the natural rate of unemployment (NRU)

structural + frictional = NRU

It is the range for the natural rate of unemployment in the US

It relates the amount by which actual unemployment exceeds the natural rate to the GDP gap

Okun's Law states that for every 1% that the actual rate of unemployment exceeds the natural rate, this GDP gap exists

Demographically, these groups are hit hardest by unemployment

teenagers, men, low-skilled workers, lower education levels

It is a rise in the general level of prices

It is inflation caused by consumption spending; too many dollars chasing not enough products

It is inflation caused by rising production costs

cost-push inflation

It is inflation in excess of 50% a year; usually precedes an economic collapse

It is income received as WRIP

It is income adjusted for inflation

They are most hurt by inflation

creditors, fixed-income receivers,savers

They actually benefit from inflation

flexible-income receivers, debtors

It is the formula for calculating the real interest rate

nominal rate - inflation rate

It is inflation during a recession; it is very unusual but arose during the late 1970s

stagflation (stagnant economy + inflation)

It is the formula for the spending multiplier.

It is the formula for the tax multiplier

It is always the value of the balanced budget multiplier

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.)

It is the practical significance of the spending multiplier

Relatively small changes in spending are magnified into larger changes in GDP

The are the determinants of aggregate demand.

Consumption, Investment, Government Spending, and Net Exports

Give three examples of injections into the circular flow of the economy.

exports, government spending, investment spending

Give three examples of leakages from the circular flow of the economy

taxes, imports, savings

It is the formula for determining the real interest rate.

Nominal interest rate-inflation rate =real interest rate

It is the effect of a strong (appreciating) currency on imports and exports.

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)

It is the effect of a weak (depreciating) currency on imports and exports.

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)

They are the reasons for the downward sloping aggregate demand curve.

1.Real balances (wealth) effect
2. Interest rate effect
3. foreign purchases effect

It is the relationship shown in the AGGREGATE DEMAND CURVE

The INVERSE relationship between price level and real GDP/output

It is the relationship shown in the AGGREGATE SUPPLY CURVE

The direct relationship between price level and real GDP/output

It is the state of the economy in the horizontal range of aggregate supply

It is the state of the economy in the upsloping/intermediate range of aggregate supply

It is the state of the economy in the vertical range of aggregate supply

full employment

Which would increase GDP by the greatest amount: a $100 million increase in government spending, or a $100 million decrease in lump sum taxes?

$100 spending increase, because the spending multiplier is greater than the tax multiplier

They are the shifters/determinants of aggregate supply

Input prices, productivity, and the legal/institutional environment

It is the formula for productivity

total output/total inputs
(In other words, how much we get out of what we put in)

It is the effect of a tax cut on aggregate supply

Taxes decrease, aggregate supply increases (and vice versa)

It is the effect of deregulation of an industry on aggregate supply

Deregulation = an increase in aggregate supply

It is the ability of a firm to set its price(above a competitive rate)

monopoly power/market power

It occurs when aggregate demand increases when GDP is at full employment

demand-pull inflation

It is the term for inflation during a recession (stagnant economy)

These two government bodies carry out fiscal policy

Congress and the President

Fiscal policy that seeks to expand/increase real GDP

expansionary policy

Fiscal policy that seeks to fight inflation during an expansion

contractionary policy

They are the two tools of fiscal policy

taxing and spending

This budget situation occurs during expansionary policy (revenues down, spending up)

This budget situation occurs during contractionary policy (revenues up, spending down)

Entitlement programs and our marginal progressive tax system are examples of this type of fiscal policy measure.

automatic fiscal policy

Specific government actions that increase or decrease taxes or spending measures are examples of this type of fiscal policy measure.

discretionary fiscal policy

This term refers to the possibility that politicians might manipulate the economy to enhance their chances of reelection

political business cycle

This term refers to higher than normal interest rates caused by heavy government borrowing that thus reduce investment spending

crowding out effect

They are three functions of money

medium of exchange, measure of value, store of value

When you are estimating your total expenses for college next year, you are using money as _____.

a measure of value/standard of value/unit of account

When you put your graduation gift money in a certificate of deposit for 6 months to earn interest, you are using money as ___

a store of value

When you use your first lottery winnings to buy Christmas gifts for your teachers, you are using money as ________

a medium of exchange

It is money in its narrowest definition---currency, coins, and demand deposits

It is M1 + smaller time deposits

It is M2 + large/institutional time deposits

The US is on this type of monetary standard

inconvertible fiat money standard

It is money that has another use , such as cigarettes used for transactions in prison.

commodity money

What government entity issues our paper currency

The Federal Reserve

What government entity controls monetary policy in the US?

The Federal Reserve

She is the Chairman of the Federal Reserve

They are the three tools of monetary policy.

Open market operations, the discount rate, and the reserve requirement

When the Fed is concerned about a recession, what type of monetary policy will they pursue?

expansionary policy

As part of expansionary monetary policy, what options does the Fed have with its 3 primary tools?

Buy securities/bonds; lower the discount rate, lower the reserve requirement

As part of contractionary monetary policy, what options does the Fed have with its 3 primary tools?

Sell securities/bonds, lower the discount rate, lower the reserve requirement

This determines how much a bank may lend.

Its excess reserves

It is the formula for the money multiplier

1/required reserve ratio

It is the interest rate that the Fed charges member banks to borrow from it

the discount rate

It is the interest rate that banks charge each other to borrow money

Federal Funds Rate

It is the equation of exchange

According to monetarist theory and the equation of exchange, what will happen to nominal GDP when the money supply increases?

nominal GDP will increase

On a bank's t-account, demand deposits will go under this category

On a bank's t-account, loans will go under this category

On a bank's t-account, the government securities that the bank owns will go under this category

If our economy is experiencing both high unemployment and high inflation, which will the Fed address FIRST?

inflation
IT IS PUBLIC ENEMY #1

When the money supply increases, interest rates will move in this direction?

If the Fed pursues a "tight money" or contractionary policy, interest rates will move in this direction

When the interest rate rises, bond values move in this direction.

down
**BOND VALUES AND INTEREST RATES MOVE IN OPPOSITE DIRECTIONS

If the RRR is 10%, this is the value of the money multiplier.

The demand for money is driven by these three motives.

Transactions motive, speculative motive, precautionary motive.

Of the 3 motives for money demand, it is the motive to have cash to pay for goods and services.

Transactions motive

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.

Speculative motive

Of the 3 motives for money demand, it is the motive to hold cash for unexpected expenses.

precautionary motive

On the money market graph, , this curve is vertical.

On the money market graph, it is on the vertical axis.

It is the formula for determining a bank's excess reserves from a deposit.

Deposit - reserve requirement

It is the formula for determining the maximum change in loans from a deposit

excess reserves x money multiplier

It is the formula for determining the maximum change in the money supply from a deposit

change in loans + amount of original deposit

It is money by government decree; it has value because the government deems it so

It is the cost of holding money (not saving it or investing it)

the interest that it could earn

Industries/businesses most likely to be impacted by changes in monetary policy

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

What actions are taken as part of FISCAL POLICY?

tax increases/decreases;spending increases/decreases

Who is charge of FISCAL POLICY?

Congress and the President

Does the Fed set tax rates?

absolute advantage

the ability to produce more of a good than another country

comparative advantage

the ability to produce a good at a lower opportunity cost than another country

increase in the value of a currency relative to another currency

decrease in the value of a currency relative to another currency

WEAK dollar > EXPORT more >move to a trade SURPLUS

STRONG dollar > IMPORT more > move to a trade DEFICIT

sale of products in a foreign country at prices either below costs or below prices at home

rates at which currencies trade for one another

nontarrif barriers

all impediments other than protective tariffs that nations establish to impede imports, including quotas, licensing requirements, unreasonable product quality standards, etc.

North American Free Trade Agreement

1993 agreement establishing a free trade zone composed of Canada, Mexico, and the US

practice of shifting work previously done by American workers to workers located in other nations

Smoot-Hawley Tariff Act

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.

taxes imposed by a nation on imported goods

rate at which units by one product can be exchanged for units of another product

group of nations that lower or abolish trade barriers among themselves

World Trade Organization

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

Current Account

in the balance of trade accounting system, this includes imports and exports of goods and services, investment income, and transfers.

Capital/Financial Account

in the balance of trade accounting system, this includes real and financial assets

Official Reserves

in the balance of trade accounting system, the central bank holds reserves of foreign currencies to offset deficits and surpluses

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