AP Macroeconomics Terms

the branch of economics that studies the overall working of a national economy
aggregate output
The total quantity of goods and services produced in an economy in a given period.
the financial gain (earned or unearned) accruing over a given period of time
aggregate demand
total demand for goods and services in an economy
aggregate supply
total supply of goods and services in an economy
sticky prices
Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded.
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great depression
the economic crisis beginning with the stock market crash in 1929 and continuing through the 1930s
John Maynard Keynes
English economist who advocated the use of government monetary and fiscal policy to maintain full employment without inflation (1883-1946)
a general and progressive increase in prices
demand pull inflation
increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand
cost push inflation
When prices rise due to an increase in the cost of production.
severe and prolonged inflation that results in the value of money losing its acceptability as a medium of exchange
a contraction of economic activity resulting in a decline of prices
a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)
the state of the economy declines
business cycle
recurring fluctuations in economic activity consisting of recession and recovery and growth and decline
a period of economic growth as measured by a rise in real GDP
a period of economic decline marked by falling real GDP
a long-term economic state characterized by unemployment and low prices and low levels of trade and investment
unemployment rate
the percentage of the work force that is unemployed at any given date
fiscal policy
a government policy for dealing with the budget (especially with taxation and borrowing)
monetary policy
policy that involves changing the rate of growth of the money supply in circulation in order to affect the cost and availability of credit
supply side policies
Government policies that focus on stimulating aggregate supply instead of aggregate demand.
transfer payments
Cash payments made by the government to people who do not supply goods, services, or labor in exchange for these payments. They include Social Security benefits, veterans’ benefits, and welfare payments.
Gross Domestic Product- the total market value of all final goods and services produced annually in an economy
Gross National Product – the sum of all goods and services produced in a nation in a year
final goods
Goods and services that have been purchased for final use and not for resale or further processing or manufacturing
The utilization of economic goods to satisfy needs or in manufacturing
durable goods
items with lasting value, the purchase of which is considered a form of savings
nondurable goods
goods that lasts a short period, such as food, light bulbs, and sneakers
performance of duties or provision of space and equipment helpful to others
planned investment
the amount that firms plan or intend to invest
government purchases
spending on goods and services by local, state, and federal governments
net exports
exports minus imports
indirect taxes
Taxes such as sales, excies, and property taxes as well as taxes that are part of a firm’s cost of producing a product, these are usually passed on to the consumer
a grant or contribution of money, especially one made by a government
net factor payments
These are the payments received by domestic factors of production from abroad minus the payments to foreign factors of production from domestic sources.
net national product
A measure of all goods and services produced by a country in a year, including production from its investments abroad, minus the loss or degradation of natural resource capital as a result of productivity.
personal saving rate
the percentage of disposable personal income that is saved
nominal GDP
the GDP measured in terms of the price level at the time of measurement (unadjusted for inflation)
underground economy
buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal
gross national income
The total value of goods and services produced by a country per year plus net income earned abroad by its nationals; formerly called “gross national product.”
frictional unemployment
unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
structural unemployment
unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
natural rate of unemployment
The “normal” unemployment rate due to frictional and structural conditions in labor markets. It is the unemployment rate that occurs when the economy is operating at a sustainable rate of output
cyclical unemployment
unemployment that rises during economic downturns and falls when the economy improves
an index of the cost of all goods and services to a typical consumer
producer price index
a measure of the cost of a basket of goods and services bought by firms
real interest rate
the interest rate corrected for the effects of inflation
money set aside, generally in a bank or investments
consumption function
The relationship between consumption and income.
marginal propensity to consume
MPC = Marginal Propensity to Consume – the ratio of the change in consumption spending to a given change in income. MPC = change in C/change in Y
marginal propensity to save
the change in one’s savings caused by the change in one’s income. change in savings (S)/change in income (Y)
planned aggregate expenditure
the total amount the economy plans to spend in a given period. It is equal to Consumption (C) plus Planned Investment (I) AE= C+I
money multiplier
The multiple by which deposits can increase for every dollar increase in reserves; equal to 1 divided by the required reserve ratio
paradox of thrift
A Keynesian concept explaining why consumers will not help the economy get out of a recession
net taxes
The amount remaining after costs of goods sold and operating expenses are subtracted from sales
disposable income
income (after taxes) that is available to you for saving or spending
budget deficit
an excess of expenditures over revenues
leakages and injections
exceptions in the circular flow of income.
government spending multiplier
the ratio of the change in the equilibrium level of output to a change in government spending (1/MPS)
tax multiplier
The ratio of change in the equilibrium level of output to a change in taxes
balanced budget multiplier
Gives the change in equilibrium output that results from 1-unit increase or decrease in both taxes and government spending.
federal debt
all the money borrowed by the federal government over the years and still outstanding
automatic stabilizers
changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action
fiscal drag
The negative effect on the economy that occurs when average tax rates increase because taxpayers have moved into higher income brackets during an expansion.
structural deficit
the deficit that remains at full employment
cyclical deficit
the deficit that occurs because of a downturn in the business cycle.
commodity money
objects that have value in themselves and that are also used as money
fiat money
money that has value because the government has ordered that it is an acceptable
currency debasement
the decrease in the value of money that occurs when its supply is increased rapidly
narrowest measure of the money supply that includes all coins and paper bills in circulation, traveler’s checks, checking account balances, and balances in credit unions
All of M1 + less immediate (liquid) forms of money to include savings, money market mutual funds, and small denomination time deposits.
required reserves ratio
Percentage of deposits that the fed requires a bank to hold in vault cash or on deposit with the Fed.
The Federal Open Market Committee is the most powerful committee of the FED, because it makes the decisions that affect the economy as a whole by manipulating the money supply.
discount rate
the rate of interest set by the Federal Reserve that member banks are charged when they borrow money through the Federal Reserve System
tight money
the economic condition in which credit is difficult to secure and interest rates are high
easy money
the economic condition in which credit is easy to secure
expansionary policies
fiscal policies, like higher spending and tax cuts, that encourage economic growth
crowding out effect
the loss of funds for private investment caused by government borrowing
contractionary policy
a fiscal policy used to reduce economic growth, often through decreased spending or higher taxes
aggregate demand
the amount of goods and services in the economy that will be purchased at all possible price levels
aggregate supply
the total amount of goods and services in the economy available at all possible price levels
cost shock
a change in costs that shifts the short-run aggregate supply curve
supply shock
An unexpected event that causes the short-run aggregate supply curve to shift
sticky wages
occur when workers are unable to change their nominal wage rate easily in response to changing overall prices
cost of living adjustment
efficiency wage theory
A theory stating that wages influence worker productivity
Phillip’s curve
A curve that shows the short-run trade-off between inflation and unemployment.
a certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation in order to raise money
a certificate documenting the shareholder’s ownership in the corporation
average propensity to consume
fraction or % of disposable income that households plan to spend for consumer goods and services; consumption divided by disposable income
nominal wage rate
The wage rate in current dollars.
real wage rate
wage rate adjusted for inflation
the ratio of the quantity and quality of units produced to the labor per unit of time
Okun’s Law
This details the inverse relationship between unemployment and real GDP.
economic growth
steady growth in the productive capacity of the economy (and so a growth of national income)
aggregate production function
a function describing the relationship between the quantity of inputs used in a country and the quantity of output produced in a country
velocity of money
the rate at which money changes hands
quantity theory of money
a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
real business cycle theory
an attempt to explain business cycle fluctuations under the assumptions of complete price and wage flexibility and rational expectations
Laffer Curve
a graph purporting to show the relation between tax rates and government income
exchange rate
the charge for exchanging currency of one country for currency of another
a government tax on imports or exports
selling goods abroad at a price below that charged in the domestic market
Smoot-Hawley tariff
raised US tariffs, prolonged depression
General Agreement on Tariffs and Trade; international trade organization ehtat encourages free trade by lowering tariffs and other trade restrictions
North American Free Trade Agreement; allows open trade with US, Mexico, and Canada
balance of payments
a system of recording all of a country’s economic transactions with the rest of the world over a period of one year
balance of trade
the difference in value over a period of time of a country’s imports and exports of merchandise
trade deficit
an excess of imports over exports
balance on current account
the exports of a goods and services of a nation minus its imports of goods and services plus its net investment income and net transfers in a year
net exports
exports minus imports
floating exchange rates
Prices of different currencies move up and down based on the demand for and the supply of each currency