AP Macroeconomics Units 1-4
Terms in this set (151)
Factors of Production
5. Sometimes Foreign Trade
Shifters of Demand for Loanable Funds
1. Incentive to Invest
2. Contractionary Fiscal Policy (to the right)
Shifters of Supply of Loanable Funds
1. Incentive to Save
2. Monetary Policy
3. Expansionary Fiscal Policy (to the left)
Shifters of Money Supply
Shifters of Money Demand
1. Price Level
3. Fiscal Policy
Demand and Supply Graph
Money Market Graph
Loanable Funds Graph
Investment Demand Graph
Real Interest Rate
the interest rate corrected for the effects of inflation; Nominal interest rate - inflation rate
1/RRR where RRR equals the required reserve ratio. Application: an initial injection of $1,000 of new money into a banking system with a reserve ratio of 0.1 will generate up to $1,000 x (10) = $10,000 in total money.
A country or individual has an absolute advantage in the production of a good when the country can produce the good using fewer resources (inputs) than another country or individual.
An increase in the value of one currency relative to another, resulting from an increase in demand for or a decrease in supply of the currency on the foreign exchange market.
Balance Of Payments
Measures all the monetary exchanges between one nation and all other nations. Includes the current account and the capital account.
A certificate of debt issued by a company or government to an investor.
When a government spends more than it collects in tax revenues in a given year.
Human-made resources (machinery and equipment) used to produce goods and services; goods that do not directly satisfy human wants. Sometimes separated into human capital (education, know-how) and physical (tools you can touch and operate).
Capital Account (AKA Financial Account)
Measures the flow of funds for investment in real assets (such as factories or office buildings) or financial assets (such as stocks and bonds) between a nation and the rest of the world.
"Other things being equal"; used as a reminder that all variables other than the ones being studied are assumed to be constant.
When an individual, a firm, or a nation is able to produce a particular product at a lower opportunity cost than another individual, firm, or nation. Comparative advantage is the basis on which nations trade with one another.
A component of a nation's aggregate demand; measures the total spending by domestic households of goods and services.
Contractionary Fiscal Policy
A policy whereby government increases taxes or decreases its spending in order to reduce aggregate demand. Could be used in a period of high inflation to bring down the inflation rate.
Contractionary Monetary Policy
A demand-side policy whereby the central bank
1. Increase Reserve Requirements
2. Decrease Discount Rates
3. Sell Open-Market Operations (Government Bonds/Securities)reduces the supply of money, increase interest rates and reducing aggregate demand. Could be used to bring down high inflation rates.
The rise in interest rates and the resulting decrease in investment spending in the economy caused by increased government borrowing in the loanable funds market. Seen as a disadvantageous side effect of expansionary fiscal policy.
Measures the balance of trade in goods and services and the flow on income between one nation and all other nations. It also records monetary gifts or grants that flow into or out of a country. Equal to a country's net exports (its exports minus its imports).
A deposit in a commercial bank against which checks may be written. Also known as a "checkable deposit".
A decrease in the value of one currency relative to another, resulting from a decrase in demand for or an increase in the supply of the currency on the foreign exchange market.
When a government intervenes in the market for its own currency to weaken it relative to another currency.
One of the three tools of monetary policy, it is the interest rate that the federal government charges on the loans it makes to commercial banks.
An increase in the potential output of goods and services in a nation over time.
Land, labor, capital, and entrepreneurial ability that are used in the production of goods and services. They are "economic" resources because they are scarce (limited in supply and desired). Also known as "factors of production".
The amount by which a bank's actual reserves exceed its required reserves. Banks can lend excess reserves; when they do, they expand the money supply. The amount of excess reserves in the banking system determines equilibrium interest rate.
The price of one currency in terms of another currency, determined in the forex market.
The spending by foreigners on domestically produced goods and services. Counts as an injection into a nation's circular flow of income.
Federal Funds Rate
The interest rate banks charge one another on overnight loans made out of their excess reserves. The FFR is the interest rate targeted by the FEd through it's open market operations.
Changes in government spending and tax collections implemented by government with the aim of either increasing or decreasing aggregate demand to achieve the macroeconomic objectives of full employment and price-level stability.
Floating Exchange Rate System:
When a currency's exchange rate is determined by the free interaction of supply and demand in international forex markets.
Forex Markets (Foreign Exchange Market)
The market in which international buyers and sellers exchange foreign currencies for one another to buy and sell goods, services, and assets from various countries. It is where a currency's exchange rate relative to other currencies is determined.
Fractional Reserve Banking
A banking system in which banks hold only a fraction of deposits as required reserves and can lend some of the money deposited by their customers to other borrowers
The value skills integrated into labor through education, training, knowledge, and health. An important determinant of aggregate supply and the level of economic growth in a nation.
Spending on goods and services produced in foreign nations. Counts as a leakage from a nation's circular flow of income.
A rise in the average level of prices in the economy over time (percentage change in the CPI)
The opportunity cost of money. Either the cost of borrowing money or the cost of spending money (e.g., the interest rate is what would be given up by not saving money). Conversely, this is the price a lender is paid for allowing someone else to use money for time.
A component of aggregate demand, it includes all spending on capital equipment, inventories, and technology by firms. This does not include financial investment, which is the purchase of financial assets (stocks and bonds). Also includes household purchasing of newly constructed residences.
Law of Increased Opportunity Cost
As more of particular product is produced, the opportunity cost, in terms o what must be given up of other goods to produce each unit of the product, increases. Explains the convex shape of a nation's production possibilities curve.
Loanable Funds Market
The market in which the demand for private investment and the supply of household savings intersect to determine the equilibrium real interest rate.
The period of time over which the wage rate and price level of inputs in a nation are flexible. In the long run, any changes in AD are cancelled out due to flexibility of wages and prices and an economy will return to its full employment level of output. Sometimes referred to as the "flexible wage period".
A component of money supply including currency and checkable deposits
A more broadly defined component of money supply, equal to M! plus savings deposits, money-market deposits, mutual funds, and small-time deposits.
The broadest component of the money supply. Equal to M2 plus large time deposits.
The study of entire nations economies and the interactions between households, firms, government, and the foreigners
Managed or Fixed Exchange Rate System
When a government or central bank takes action to manage or fix the value of its currency relative to another currency on the forex market
The central bank's manipulation of the supply of money aimed at raising or lowering interest rates to stimulate or contract the level of aggregate demand to promote the macroeconomic objectives of price-level stability and full employment
Any object that can be used to facilitate the exchange of goods and services in a market.
The sum of the transaction demand and the asset demand for money. Inversely related to the nominal interest rate.
The market where the supply of money is set by the central bank; includes the downward sloping money-demand curve and a vertical money-supply curve. The "price" of money is the nominal interest rate.
The vertical curve representing the total supply of excess reserves in a nation's banking system. Determined by the monetary policy actions of the central bank.
The central bank's buying and selling of government bonds on the open market from commercial banks and the public. This is aimed at increasing or decreasing the level of reserves in the banking system and thereby affects the interest rate and the level of aggregate demand.
What must be given up to have anything else. Opportunity costs are not neccesarily monetary costs, but rather include what you could do with the resources you use to undertake any activity or exchange.
Production Possibilities Curve (PPC)
A graph that shows the various combinations of output that the economy can produce given the available factors of production and the available production technology.
The output per unit of input of a resource. An important determinant of the level of aggregate supply in a nation.
The use of tariffs, quotas, or subsidies to give domestic producers a competitive advantage over foreign producers. Meant to protect domestic production and employment from foreign competition.
When a country's total spending on imported goods and services exceeds its total revenues from the sale of exports to the rest of the world. Synonymous with a surplus in the current account of the balance of the payments and with a negative net export component of the GDP.
When a country's sale of exports exceeds its spending on imports. Synonymous with a surplus in the current account of the balance of payments.
An important determinant of consumption. Wealth is the total value of a household's assets minus all its liabilities.
significantly responsive to a change in price.
expansionary fiscal policy
enacted when the government deliberately increases its deficit to stimulate the economy; the government increases its spending (increases G), cuts taxes (decreases T), or both, and stimulates the economy by expanding aggregate demand (AD).
expansionary monetary policy
monetary policy methods by which the Fed aims to increase the money supply and lower interest rates, thereby creating an increase in output; in pursuit of expansionary policy goals, the Fed can lower the required reserve ratio, lower the discount rate, or purchase government securities on the open market.
restrictions on the quantity of a good that can be imported
not significantly responsive to changes in price.
a good for which there is less demand as income rises; a good the demand for which falls as income rises and rises as income falls; consumer income rises while demand decreases.
the group of individuals who are either working or actively looking for work; the labor force includes the unemployed: labor force = number of individuals in labor force/number of individuals in the adult population, expressed as a percentage.
law of demand
states that as prices rise, people are willing and able to buy less of a good and, hence, the quantity demanded decreases; as prices fall, people are willing and able to buy more, so the quantity demanded increases and the demand curve slopes downwards.
law of supply
states that as the price of a good increases, the quantity supplied of a good increases, and as the price of a good decreases, the quantity supplied of the good decreases.
the addition to total revenue created by selling one additional unit of ouput.
market demand curve
the sum of each individual consumer's demand curves for a certain good in a market (e.g., all the individual quantities of Good B demanded at each price).
occurs when supply and demand are balanced such that the market price and the quantity exchanged are under no market pressure to change.
market supply curve
the sum of all the quantities of a good supplies by all producers at each price.
an industry structure in which there is only one seller for a product.
the gross domestic product calculated using current-year prices; for example, the nominal GDP for 2001 would calculate the value of production using2001 prices for goods and services. Nominal GDP can vary widely from year to year, due to forces such as inflation.
a market with only a few sellers, each offering a product that is largely the same as the others' products; in an oligopoly, there is always a tension between cooperation and competition.
required reserve ratio (RRR)
a specific percentage of checking account deposits that each bank must keep in liquid, zero-interest reserves; this amount is set by the Fed.
rule of 70
mathematical approximation used to measure the effect of economic growth; this rule tells us the approximate number of years it will take for some measure (real GDP, price level, savings account, etc.) to double given a known annual percentage increase.
the conflict between limited resources and unlimited human wants; the basic economic problem facing all societies.
simple money multiplier
1/RRR, where RRR is the required reserve ratio expressed as a decimal; if the required reserve ratio is 10% (0.1), the money multiplier is 1/0.1 = 10.
a special tax imposed on imported goods.
the dollar value of all the goods and services sold to house holds.
the dollar value of goods and services sold to governments.
the willingness and ability of buyers to purchase a good or service.
a relationship between two factors in which the factors move in opposite directions. ex: price increases, then quantity decreases.
a relationship between two factors in which the factors move in the same direction.
a table showing quantities of a good demanded at varying prices; a table demonstrating the number of units of a good demanded at various points.
the graphical representation of the law of demand. Shows the amount of a good buyers are willing and able to buy at various prices.
a good the demand for which rises as income rises and falls as income falls; consumer income rises and demand rises.
decisions by individuals about what to do and what not to do.
decisions of individual producers and consumers determine what how and for whom to reduce. Minor Government interference. Economy is run by itself.
government officials make decisions about economy.
anything that can be used to produce something else
anything from the land and/or nature. Ex: minerals, timber, petroleum, cotton.
the effort of workers.
the efforts of entrepreneurs in organizing resources for production taking risk to create new enterprises and innovating to develop new product.
the branch of economics that deals with human behavior and choices as they relate to relatively small units--the individual, the business firm, a single market.
anything that shows the economy as a whole.
when consumers substitute a similar, lower priced product for a product which is relatively more expensive.
diminishing marginal utility
a law stating that as an additional unit of a particular food is consumed the utility (satisfaction) gained decreases.
change in quantity demanded
a movement along the demand curve in response to a change in price, ceteris paribus; change in price means move along the demand curve; movement = money.
an increase or decrease in consumer income will cause a shift in the Demand Curve.
consumer income rise
results an increase in the demand for normal goods and a decrease in the demand for inferior goods.
goods that go together, if price ↑ the demand for both that good and complimentary good ↓.
goods that compete with one another. If the price for one goes up the demand for the other will go up.
changes in consumer expectations
a shift in the demand curve resulting from consumer expectations regarding future income or future price of Goods and Services.
number or composition of consumers
(population); then there is a shift in the demand curve resulting from and increase or decrease in market demand, as specific consumption related to demographics is concerned.
consumer taste and preferences
a shift of the demand curve resulting from a change in consumer taste and preferences.
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.
study of how people and societies use limited resources to satisfy unlimited wants; the management of scarcity and choice
A legal maximum on the price at which a good can be sold
A legal minimum on the price at which a good can be sold
depreciation vs. appreciation of a currency
depreciation - decrease in VALUE of currency
app-The rise in value of one currency relative to another.
Excess reserves vs.
-Reserves greater than the required amounts.
-Reserves that a bank is legally required to hold, based on its checking account deposits
Money that has value because the government has ordered that it is an acceptable means to pay debts
Ability or capacity of a good or service to be useful and give satisfaction to someone.
Two goods are consumer substitutes if they provide essentially the same utility to consumers
law of diminishing marginal utility
beyond some point, extra product attributed to each additional unit of labor will decline
nominal interest rate
the interest rate as usually reported without a correction for the effects of inflation
A limit placed on the quantities of a product that can be imported
Analysis that involves comparing marginal benefits and marginal costs
when two variables move together.
goods and services that consumers want to acquire.
an economy with some public influence over the workings of free markets. There may also be some public ownership mixed in with private property.
Production Possibilities Frontier
shows the different combinations of various goods can be produced, given the available resources and existing technology.
using all available resources to produce the maximum amount of output permitted by the current technology.
Division of Labor
breaking up a task into a number of smaller, more specialized tasks so that each worker can become more adept at a particular job.
a form of economic organization in which resource allocation decisions are left to individual producers and consumers acting in their own best interests without central direction.
a phrase coined by Adam Smith to describe how, by pursuing their own self-interests, people in a market system seem to be "led by an invisible hand" to promote societal well-being as a whole.
the number of units that consumers want to buy over a specified period of time.
Shift in a Demand Curve
occurs when any variable other than price changes. If consumers want to buy more at any and all given prices than they wanted previously, the demand curve shifts to the right (or outward). If they desire less at any given price, the demand curve shifts to the left (or inward).
the number of units that sellers want to sell over a specified period of time.
a table showing how the quantity supplied of some product during a specified period of time changes as the price of that product changes, holding all other determinants of quantity supplied constant.
a graphical depiction of a supply schedule. It shows how the quantity supplied of some product during a specified period of time will change as the price of that product changes, holding all other determinants of quantity supplied constant.
an excess of quantity demanded over quantity supplied. When there is a shortage, buyers cannot purchase the quantities they desire.
an excess of quantity supplied over quantity demanded. When there is a surplus, sellers cannot sell the quantities they desire to supply.
a situation in which there are no inherent forces that produce change. Changes away from an equilibrium position will occur only as a result of "outside events" that disturb the status quo.
Law of Supply and Demand
in a free market the forces of supply and demand generally push the price toward the level at which quantity supplied and quantity demanded are equal.
the volume of goods and services that a given sum of money will buy.
Real Rate of Interest
the percentage increase in purchasing power that the borrower pays to the lender for the privilege of borrowing.
Nominal Rate of Interest
the percentage by which the money the borrower pays back exceeds the money that he borrowed, making no adjustment for any fall in purchasing power of this money that results from inflation.
laws and conventions that assign owners the rights to use their property as they see fit while they own it.
Research and Development
activities aimed at inventing new products or processes, or improving old ones.
Foreign direct investment
purchase or construction of real business assets—such as factories, offices, and machinery—in a foreign country.
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