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AP MACRO REVIEW

Key Concepts:

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
utility
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
land
manufactured/manmade tools used in production
capital
all human effort, physical and mental
labor
the risktaker that combines land, labor, and capital in order to create a new product
entrepreneur
income received by labor
wages
income received by capital
interest
income received by land
rent
income received by entrepreneurs
profit
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
consumer goods
products that satisfay our wants indirectly, by producing the goods and services we do want
capital goods
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"
MB>MC
"too much of a good thing"
MC>MB
"just right"
MB=MC
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
traditional
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
households
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
capital goods
In any given situation, they are the choices you have (also labels on the PPC)
trade-offs
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)
scarcity
the basic economic problem; it is a lack of needed or wanted resources relative to the demand for the resources.
TINSTAAFL
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
microeconomics
looks at specific economic units such as businesses and consumer behavior
macroeconomics
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.
elasticity
A change in this causes a change in quantity demanded ( movement along the curve)
price
The market is in this state when QS=QD.
equilibrium
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.
shortage
An increase in demand or supply will shift the curve in this direction.
right
This condition exists when QS>QD.
surplus
A decrease in demand or supply will shift the curve in this direction.
left
When demand increases (shifts right), both price and quantity will do this.
increase
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.
decrease
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).
Price
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.
specialization
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).
barter
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.
Normal profit
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.
derived demand
The "father" of classical economics, author of THE WEALTH OF NATIONS.
Adam Smith
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.
saving
Products that have expected lives of 3 years or more.
durable goods
Products that have expected lives of less than three years.
nondurable goods
A factory, mine, store, or warehouse
plant
A business organization that owns and operates plants.
firm
A group of firms that produce the same (or similar) products
industry
A business owned and operated by one person.
sole proprietorhship
A business owned and operated by two or more people.
partnership
A business owned by stockholders and run by a Board of Directors.
corporation
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.
stocks
A promise to repay a loan.
bond
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.
monopoly
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.
spillover cost
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.
public goods
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"
partnership
It is a business owned by stockholders and run by a board of directors; must be chartered by the state or local governments
corporation
It is the most common form of business in the US
sole proprietorship
This type of business receives the majority of profits
corporation
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
limited life
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
unlimited life
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.
corporation
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
merger
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
conglomerate
It is a corporation that has production or financial operations in more than one country
multinational
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
oligopoly
It is a market structure with one producer of a good or service; it rarely exists in the market system
monopoly
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
bull market
This animal represents a market in which prices are dropping because owners are selling their stock
bear market
It is a stockholder's share of company profits, typically paid quarterly
dividend
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
real GDP
In national income accounting, it is the largest accounting category for the US
GDP
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
inflation
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
unemployment
During expansion, it is the biggest threat to the economy
inflation
It is the point where GDP stops increasing
peak
It is the point where GDP stops declining
Trough
During a recession, production of these goods is hit hardest
durable goods
It is positive unemployment, sometimes temporary or by choice
frictional
It is unemployment in which job seekers and job vacancies do not match; comes from a fundamental change in economic activity; sometimes technological
structural
It is unemployment related to recession
cyclical
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
4-6%
It relates the amount by which actual unemployment exceeds the natural rate to the GDP gap
Okuns Law
Okun's Law states that for every 1% that the actual rate of unemployment exceeds the natural rate, this GDP gap exists
2%
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
inflation
It is inflation caused by consumption spending; too many dollars chasing not enough products
demand-pull
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
hyperinflation
It is income received as WRIP
nominal income
It is income adjusted for inflation
real income
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.
1/MPS
It is the formula for the tax multiplier
-MPC/MPS
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
recession
It is the state of the economy in the upsloping/intermediate range of aggregate supply
expansion
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)
stagflation
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)
budget deficit
This budget situation occurs during contractionary policy (revenues up, spending down)
budget surplus
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
M1
It is M1 + smaller time deposits
M2
It is M2 + large/institutional time deposits
M3
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
Janet Yellen
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
MV=PQ
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
liabilities
On a bank's t-account, loans will go under this category
assets
On a bank's t-account, the government securities that the bank owns will go under this category
assets
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?
down
If the Fed pursues a "tight money" or contractionary policy, interest rates will move in this direction
up
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.
10
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.
Money supply
On the money market graph, it is on the vertical axis.
interest rate
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
fiat
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?
NOOOOOOOOOOOOO
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
appreciation
increase in the value of a currency relative to another currency
depreciation
decrease in the value of a currency relative to another currency
WES
WEAK dollar > EXPORT more >move to a trade SURPLUS
SID
STRONG dollar > IMPORT more > move to a trade DEFICIT
dumping
sale of products in a foreign country at prices either below costs or below prices at home
exchange rate
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
offshoring
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.
tariffs
taxes imposed by a nation on imported goods
terms of trade
rate at which units by one product can be exchanged for units of another product
trade bloc
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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