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AP Macroeconomics > AP Macroeconomics - Ultimate Review > Flashcards

AP Macroeconomics - Ultimate Review Flashcards

1
Q

absolute advantage

A

a situation in which a person or country can produce more of a particular product from a specific quantity of resources than some other person or country

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2
Q

capital

A

human-made resources (buildings, machinery, and equipment) used to produce goods and services; goods that do not directly satisfy human wants; also called capital goods

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3
Q

ceteris paribus

A

The assumption that factors other than those being considered are held constant

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4
Q

comparative advantage

A

a situation in which a person or country can produce a specific product at a lower opportunity cost than some other person or country; the basis for specialization and trade

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5
Q

complements

A

products and services that are used together. When the price of one falls, the demand for the other increases (and conversely)

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6
Q

economic growth

A

An increase in the capacity of an economy to produce goods and services, compared from one period of time to another

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7
Q

factors of production

A

Economic resources: land, capital, labor, and entrepreneurial ability

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8
Q

fallacy of composition

A

The false notion that what is true for the individual (or part) is necessarily true for the group (or whole)

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9
Q

inferior goods

A

A good or service whose consumption declines as income rises, prices held constant

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10
Q

law of demand

A

The principle that, other things equal, an increase in a product’s price will reduce the quantity of it demanded, and conversely for a decrease in price

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11
Q

law of supply

A

The principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease

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12
Q

macroeconomics

A

The part of economics concerned with the economy as a whole; with such major aggregates as the household, business, and government sectors, and with measures of the total economy

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13
Q

microeconomics

A

The part of economics concerned with decision making by individual units such as a household, a firm, or an industry and with individual markets, specific goods and services, and product and resource prices

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14
Q

normal goods

A

A good or service whose consumption increases when income increases and falls when income decreases, price remaining constant

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15
Q

normative economics

A

The part of economics involving value judgments about what the economy should be like; focused on which economics goals and policies should be implemented; policy economics

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16
Q

opportunity cost

A

The amount of other products that must be forgone or sacrificed to produce a unit of a product

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17
Q

positive economics

A

The analysis of facts or data to establish scientific generalizations about economic behavior

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18
Q

production possibilities

A

A curve showing the different combinations of two goods or services that can be produced in a full employment, full production economy where the available supplies of resources and technology are fixed

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19
Q

scarcity

A

The ease of which you can obtain a certain good or product

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20
Q

substitutes

A

An alternate good of another good or a competitor

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21
Q

terms of trade

A

The rate at which units of one product can be changed for units of another product; the price of a good or service the amount of one good or service that must be given up to obtain 1 unit of another good or service

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22
Q

gross domestic product (GDP)

A

the total market value of all final goods and services produced annually within a country (eg. USA)

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23
Q

final goods

A

products purchased for final use and not for resale

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24
Q

intermediate goods

A

products purchased for resale or further manufacturing; not counted in the spending method of calculating GDP because it would cause double counting.

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25
Q

double (multiple) counting

A

wrongly including the value of intermediate goods in GDP

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26
Q

nominal (GDP, income, interest rate)

A

unadjusted for inflation: measured at current price levels

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27
Q

price index

A

the number which shows how the weighted average of selected goods changes throughout time

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28
Q

consumer price index (CPI)

A

the number which measures the prices of a fixed “market basket” of 300+ goods and services bought by a typical consumer

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29
Q

frictional unemployment

A

type of unemployment caused by temporary layoffs and workers voluntarily changing jobs

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30
Q

structural unemployment

A

unemployment of workers whose skills are not in demand, who lack skills to obtain employment or are unable to move to places where jobs are available

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31
Q

cyclical unemployment

A

a type of unemployment caused by insufficient total spending or insufficient aggregate demand

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32
Q

rule of 70

A

the number of year it will take for some measure to double, i.e for price level doubling, divide 70 by annual inflation rate

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33
Q

demand-pull inflation

A

inflation caused by there being more demand than there is output at the existing price levels

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34
Q

cost-push (supply) inflation

A

inflation resulting from an increase in resource costs and in per unit production costs

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35
Q

cost-of-living-adjustment (COLA)

A

automatic increase in the income of workers or pensions when inflation occurs

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36
Q

deflation

A

reduction in an economy’s price level; may occur during a recession

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37
Q

resource market

A

households sell and firms buy resources or services

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38
Q

product market

A

products are sold by firms and bought by households

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39
Q

economic growth

A

outward shift in the PPC; increase in real output (GDP) or real GDP per capita; caused by increasing quantity or quality or resources, technology, and productivity

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40
Q

calculating nominal vs real GDP

A

current production in current year prices vs. current production in base year prices

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41
Q

human capital

A

improvement in labor created by education and knowledge

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42
Q

current account

A

Part of the balance of payments which consists of trade in goods and services - net exports, investment income(dividends and interest) and net transfers.

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43
Q

financial account

A

Part of the balance of payments which consists of purchases and sales of international assets such as stocks, bonds, factories, buildings, and currency by a central bank

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44
Q

Expenditure Approach for calculating GDP

A

Adds together Consumption + Investment + Government Spending + Exports - Imports (C+I+G+X-M)

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45
Q

Income Approach for calculating GDP

A

Add together Wages + Profits + Interest + Rent (W+P+I+R)

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46
Q

GDP Deflator (Price Index)

A

a measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100

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47
Q

Non-discretionary Fiscal Policy

A

Automatic Stabilizers (permanent laws, wellfare, unemployment, income tax)

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48
Q

Discretionary Fiscal Policy

A

Congress creates a bill that is designed to change AD through gov spending or taxation (lag time is an issue)

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49
Q

Stagflation

A

Slow growth, high unemployment rate, high inflation (SRAS shifts left)

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50
Q

Crowding Out

A

The decrease in private expenditures that occurs as a consequence of increased government spending or the financing needs of a budget deficit

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51
Q

Discretionary Demand-Side Fiscal Policy

A

Deliberate changes of government expenditures and/or taxes to achieve particular economic goals

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52
Q

Expansionary Demand-Side Fiscal Policy

A

Increases in government expenditures and/or decreases in taxes to achieve particular economic goals

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53
Q

Fiscal Policy

A

Changes in government expenditures and/or taxes to achieve economic efficiency

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54
Q

Interest Rate Effect

A

The changes in household and business buying as the interest rate changes

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55
Q

International Trade Effect (Net Export Effect)

A

The change in foreign sector spending as the price level changes.

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56
Q

Marginal Propensity to Consume (MPC)

A

The fraction of any change in income spent on domestically produced goods and services; equal to the change in consumption divided by the change in disposable income.

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57
Q

Marginal Propensity to Save (MPS)

A

The fraction of any change in income that is saved; equal to the change in savings divided by the change in disposable income.

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58
Q

MPC + MPS = 1

A

The fraction of an increase in disposable income that is spent (MPC) plus the fraction that is saved (MPS) must equal 1.

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59
Q

Multiplier Effect

A

The increase in total spending in an economy resulting from an initial injection of new spending. The size of the multiplier effect depends upon the spending multiplier. An effect in economics in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent.

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60
Q

Spending multiplier

A

= 1/(1-MPC) or 1/MPS. This tells you how much total spending an initial interjection of spending in the economy will generate. For example, if the MPC = .8 and the government spends $100 million, then the total increase in spending in the economy = $100 x 5 = $500 million.

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61
Q

Sticky wage and price model

A

The short-run Aggregate-Supply Curve is sometimes referred to as the “sticky wage and price model,” because workers’ wage demands take time to adjust to changes in the overall price level, and therefore, in the short-run an economy may produce well below or beyond its full employment level of output.

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62
Q

Real Balances Effect = Wealth Effect

A

One of the reasons the aggregate demand curve slopes downward: The tendency for increases in price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output. The idea that any wealth that you may have in the form of a cushion or securities becomes less valuable as prices rises because higher prices reduce real spending power, prices and output are negatively related.

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63
Q

2 Tools of Fiscal Policy

A

Federal Government engages in fiscal policy. Tool # 1 = Government Spending. Tool # 2 = Personal Income Taxes.

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64
Q

Classical Economic Theory

A

The view that an economy will self-correct from periods of economic shock if left alone. Also known as “laissez-faire” and derived from the thinking of Adam Smith, Thomas Malthus, and David Ricardo. Neoclassical theories are up-to-date versions of similar belief systems. Key idea that price levels and wages are fully flexible both upwards and downwards.

65
Q

Transfer Payment

A

A payment made when no good or service is exchanged. Allowances are private transfer payments; social security checks are governmental transfer payments. Transfer payments are NOT included in GDP because they do NOT represent production.

66
Q

factors of production

A

resources; includes land, labor, capital, and entrepreneurship.

67
Q

marginal utility

A

extra usefulness a person gets from consuming one more unit of a product.

68
Q

diminishing marginal utility

A

the more you consume of a product, the less satisfaction you receive from it.

69
Q

movement along the demand curve

A

change in quantity demanded, caused only by a change in price

70
Q

price ceiling

A

a cap on a price/maximum price allowed for a product; if set below equilibrium price, will cause a shortage.

71
Q

price floor

A

minimum price allowed for a product; if set above equilibrium, will result in a surplus.

72
Q

National accounts

A

keep track of the flows of money between different sectors of the economy

73
Q

Firm

A

an organization that uses resources to produce a product, which it then sells

74
Q

fiat money

A

currency whose value derives entirely from its official status as a means of exchange

75
Q

commodity money

A

objects that have value in themselves and that are also used as money

76
Q

3 functions of money

A
  1. medium of exchange (easily buy goods)
  2. unit of account (measures the value of goods)
  3. store of value (money allows you to store purchasing power for the future)
77
Q

Types of Money

A
  1. M1 (high liquidity)- Coins/cash/checkable deposits The Money Supply
    2.M2 (Medium liquidity)- M1 plus savings deposits/time deposits/ mutual funds below $100 K
78
Q

M1 money supply

A

the most narrowly defined money supply, equal to currency in the hands of the public, time deposits & checkable deposits (demand deposits)

79
Q

checkable deposits (demand deposits)

A

any deposit in a commercial bank or thrift institution against which a check may be written (a checking account)

80
Q

M2 Money Supply

A

Includes all of M1 money supply plus most savings accounts, money market accounts, and certificates of deposit.

81
Q

Monetary Base

A

the sum of currency in circulation and bank reserves

82
Q

financial intermediaries

A

financial institutions through which savers can indirectly provide funds to borrowers. Example: Banks hold your savings, then loan it out to others

83
Q

bank reserves

A

the money deposits held in banks or at the FED

84
Q

reserve ratio

A

the fraction of deposits that banks hold as reserves

85
Q

reserve requirement

A

the percentage of deposits that banking institutions must legally hold in reserve

86
Q

excess reserves

A

a bank’s reserves over and above its required reserves

87
Q

Total Reserves

A

required reserves + excess reserves

88
Q

monetary policy

A

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

89
Q

Tools of Monetary Policy

A

reserve requirement, discount rate, open market operations (bonds)

90
Q

federal funds rate

A

the interest rate at which banks make overnight loans to one another

91
Q

discount rate

A

Interest rate the Federal Reserve charges for loans to commercial banks

92
Q

open market operations

A

the buying and selling of government securities (bonds) to alter the supply of money. Buying bonds = bigger bucks, Selling bonds = smaller bucks

93
Q

medium of exchange

A

Any item generally accepted to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.

94
Q

unit of account

A

A standard unit in which prices can be stated and the value of goods and services can be compared

95
Q

store of value

A

an asset that serves as a means of holding wealth

96
Q

Money Supply Curve

A

shows the relationship between the quantity of money supplied and the interest rate. This curve is vertical and can only shift because of monetary policy

97
Q

Money Demand Curve

A

a graphical representation of the negative relationship between the quantity of money demanded and the interest rate; the money demand curve slopes down because, other things equal, a higher interest rate increases the opportunity cost of holding money

98
Q

Opportunity Cost of holding on to your money

A

Potential interest earned

99
Q

demand for money

A

how much money people would like to hold in their “pockets” - access to liquid assets

100
Q

expansionary monetary policy

A

Federal Reserve system actions to increase the money supply, lower interest rates, and expand real GDP

101
Q

contractionary monetary policy

A

the federal reserve’s decreasing the money supply to increase interest rates to reduce inflation and real GDP

102
Q

loanable funds market

A

The market in which the demand for private investment (loans) and the supply of household savings intersect to determine the equilibrium real interest rate.

103
Q

demand for loanable funds

A

inverse relationship between real interest rate and quantity of loans demanded. How much money firms, individuals & governments what to borrow

104
Q

supply for loanable funds

A

Direct relationship between real interest rate and loanable funds supplied. People will invest more at higher interest rates. The amount of savings made available to be loaned out

105
Q

National Savings (Closed Economy)

A

Total amount of private and public savings. Closed economy means there is no trade occurring.

106
Q

National Savings (Open Economy)

A

Total amount of private and public savings, plus net capital inflows (money coming in to country - money going out of the country). Open economy means trade is occurring.

107
Q

equation for government savings

A

government savings = taxes - government spending - transfers

108
Q

budget surplus/positive budget balance

A

tax revenue > g + tax

109
Q

budget deficit/negative budget balance

A

tax revenue < g + tax

110
Q

cyclically adjusted budget balance

A

an estimate of what the budget balance would be in real GDP were if it was exactly equal to potential output
(it separates the two effects of automatic stabilizers and discretionary fiscal policy)

111
Q

national debt

A

the accumulation of all past budget deficits + all past budget surpluses

112
Q

budget deficit

A

increase government demand for loanable funds and increases the real interest rate (then decreases C + I) called CROWDING OUT

113
Q

debt to GDP ratio

A

the government’s debt as a percentage of GDP

114
Q

implicit liabilities

A

spending promises made by governments that are effectively a debt, despite the fact that they are not included in the usual debt statistic

115
Q

why does monetary policy work?

A

bc the money multiplier!

116
Q

velocity of money

A

measures the number of times that the average dollar bill is spent in a year, the ratio of nominal GDP to the money supply

117
Q

what do the letters stand for in M x V = P x Y

A

m = money supply, v = velocity of money, p = price, y = real gdp

118
Q

money neutrality

A

changes in the money supply have no real effects in the economy
(in the LR, the only effect of the increase in the money supply is an increase in APL)

119
Q

assumption about fixed income

A

people on fixed incomes will lose if there is high inflation (because APL goes up and their income does not change with it)

120
Q

assumption about banks making fixed loans

A

banks who make loans on fixed interest rates will lose if there is high inflation

121
Q

assumption about inflation rates and saving

A

when inflation rates are high, people will hold less money

122
Q

fisher effect

A

in the LR, increases in future inflation will drive up the nominal interest rate, leaving the real interest unchanged

123
Q

seigniorage

A

the government’s right to print money

124
Q

liquidity trap

A

if we get into a situation when monetary policy is ineffective because interest rates are zero-bound

125
Q

phillips curve

A

shows the relationship between the inflation and unemployment rate

126
Q

mvmt along SRPC

A

when AD shifts, what happens to phillips curve?

127
Q

shift of SRPC

A

when AS shifts, what happens to the phillips curve?

128
Q

NAIRU stands for…

A

non-accelerating inflation rate of unemployment

129
Q

inflation targeting

A

when the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that rate

130
Q

classical model of the APL

A

the real quantity of money is always at LR equilibrium

131
Q

short-run phillips curve

A

the negative short-run relationship between unemployment rate and inflation rate

132
Q

NAIRU

A

the unemployment rate at which inflation does not change over time

133
Q

long-run phillips curve

A

shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience

134
Q

debt deflation

A

the reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation

135
Q

Keynesian theory

A

-emphasized the short-run effects instead of long-run
-SRAS is upward sloping, not vertical
-shifts in STAS affect GDP AND APL

136
Q

monetarism

A

GDP will grow steadily if money supply grows steadily

137
Q

quantity theory of money

A

M x V = P x Y

138
Q

Balance of payments accounts

A

national accounts that track both payments to and receipts from foreigners

139
Q

balance of payments on current account

A

balance of payments on goods and services plus net international transfer payments and factor income

140
Q

Balance of Payments on goods and services

A

the difference between its exports and its imports during a given period

141
Q

Balance of payments on financial account

A

the difference between its sales of assets to foreigners and its purchases of assets from foreigners during a given period

142
Q

Foreign Exchange Market

A

a market in which currencies of different countries are bought and sold

143
Q

exchange rates

A

a measurement of the value of one nation’s currency relative to the currency of other nations

144
Q

appreciation

A

An increase in the value of a currency

145
Q

Equilibrium exchange rate

A

the exchange rate at which the quantity of a currency demanded in the foreign exchange market is equal to the quantity supplied

146
Q

Real exchange rate

A

the rate at which a person can trade the goods and services of one country for the goods and services of another

147
Q

Purchasing power parity

A

A monetary measurement of development that takes into account what money buys in different countries.

148
Q

fixed exchange rate

A

An exchange rate policy under which a government commits itself to keep its currency at or around a specific value in terms of another currency or a commodity, such as gold.

149
Q

floating exchange rate

A

an exchange rate policy under which a government permits its currency to be traded on the open market without direct government control or intervention

150
Q

exchange market intervention

A

government purchases or sales of currency in the foreign exchange market

151
Q

foreign exchange reserves

A

stocks of foreign currency that governments maintain to buy their own currency on the foreign exchange market

152
Q

foreign exchange controls

A

licensing systems that limit the right of individuals to buy foreign currency

153
Q

devaluation

A

lowering the value of a nation’s currency relative to other currencies

154
Q

revaluation

A

an increase in the value of a currency that is set under a fixed exchange rate regime

155
Q

trade balance

A

the value of a nation’s exports minus the value of its imports; also called net exports

156
Q

trade surplus

A

when a country exports more than it imports

157
Q

trade deficit

A

An excess of imports over exports

158
Q

nominal exchange rate

A

the rate at which a person can trade the currency of one country for the currency of another

AP Macroeconomics (5 decks)

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