AP Macroeconomics Exam

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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 decrease in TR following an increase in price = elastic demand

When Price and TR move in opposite directions..... P↑/TR↓ or P↓/TR↑

depression

a bad depressingly prolonged recession in economic activity.

unemployed

a civilian, non-institutionalized adult is considered to be unemployed when he or she does not have a job but is actively looking for one; unemployment figures reflect the number of individuals meeting this definition who are parts of the labor force.

national economic accounts

a comprehensive group of statistics that measures various aspects of the economy's performance.

trade deficit

a country has a trade deficit if the value of its commodity imports exceeds the value of its commodity exports.

trade surplus

a country has a trade surplus if the value of its commodity exports exceeds the value of its commodity imports.

aggregate supply curve

a curve defining the relationship between real production and price level.

aggregate demand curve

a curve depicting the relationship between real GDP demanded (i.e., expenditures) and the price level in the economy; the aggregate demand curve slopes downward from left to right.

inferior good

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.

normal good

a good the demand for which rises as income rises and falls as income falls; consumer income rises and demand rises.

diminishing marginal utility

a law stating that as an additional unit of a particular food is consumed the utility (satisfaction) gained decreases.

oligopoly

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.

price index

a measure of the price level, or the average level of prices.

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.

recession

a period of slow economic growth, usually accompanied by rising unemployment; two consecutive quarters of declining output.

hidden unemployment

a person who has been unemployed and searching for a job for so long, that they have given up on finding a job and therefore forfeit unemployment.

inverse relationship

a relationship between two factors in which the factors move in opposite directions. ex: price increases, then quantity decreases.

direct relationship

a relationship between two factors in which the factors move in the same direction.

changes in consumer expectations

a shift in the demand curve resulting from consumer expectations regarding future income or future price of Goods and Services.

consumer taste and preferences

a shift of the demand curve resulting from a change in consumer taste and preferences.

tariff

a special tax imposed on imported goods.

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.

demand schedule

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.

stagflation

a type of inflation that occurs when an economy's output (real GDP decreases and its price level rises; production stagnates (as during a recession) while prices (and unemployment) go up.

hyperinflation

a very high rate of inflation, under which prices go up very rapidly, often more than 1,000 percent in a year. This causes money to become a poor store of value.

expenditure approach

a way of measuring the GDP by adding up all spending on final goods and services during a given year.

inflation

an increase in the price level

consumer good

an increase or decrease in consumer income will cause a shift in the Demand Curve.

monopoly

an industry structure in which there is only one seller for a product.

land

anything from the land and/or nature. Ex: minerals, timber, petroleum, cotton.

resource

anything that can be used to produce something else

economic aggregates

anything that shows the economy as a whole.

demand elasticity

can be measured by using TR as a gauge; a decrease in TR following an increase in Price = Elastic Demand. When Price and TR move in opposite directions..... P↑/TR↓ or P↓/TR↑

fiscal policy

changes, adjustments, and strategies that the governments implements in spending or taxation to achieve particular economic goals.

neutral good

consumer income ↑↓, demand will ↑↓.

individual choice

decisions by individuals about what to do and what not to do.

market economy

decisions of individual producers and consumers determine what how and for whom to reduce. Minor Government interference. Economy is run by itself.

money multiplier

economic tool used to determine exactly the amount of the new demand deposits that can be created from an initial deposit.

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).

investment expenditures

expeditions by businesses on plant and equipment and the change in business invention.

net exports

exports minus imports.

business cycles

fluctuations in real GDP around the trend value; also called economic fluctuations.

susbtitute goods

goods that compete with one another. If the price for one goes up the demand for the other will go up.

complimentary goods

goods that go together, if price ↑ the demand for both that good and complimentary good ↓.

law of demand

law stating that as a price of a good increases, the quantity demanded of the good decreases, and vice versa.

LRAS curve

long- run aggregate supply curve

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.

price ceiling

price control set when the market price is believed to be too high.

price floor

price control set when the market price is believed to be too low.

opportunity cost

real cost of an item is its opportunity cost.

scarce

resource is unavailable in sufficient amounts to satisfy various ways society wants to use it.

import quotas

restrictions on the quantity of a good that can be imported

consumer income rise

results an increase in the demand for normal goods and a decrease in the demand for inferior goods.

inflation

rising prices, across the board.

SRAS curve

short-run aggregate supply curve

elastic

significantly responsive to a change in price.

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.

marginal revenue

the addition to total revenue created by selling one additional unit of ouput.

quantity exchanged

the amount of a good actually sold.

purchasing power

the amount of money available to consumers to purchase goods and services.

microeconomics

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.

macroeconomics

the branch of economics that deals with human behavior and choices as they relate to the entire economy.

scarcity

the conflict between limited resources and unlimited human wants; the basic economic problem facing all societies.

opportunity cost

the cost of something in terms of what one must give up to get it.

monetary policy

the deliberate control of the money supply by the Federal government.

consumer surplus

the difference between the maximum price a consume is (or would be) willing to pay and the price he or she actually pays.

consumption expenditures

the dollar value of all the goods and services sold to house holds.

government expenditures

the dollar value of goods and services sold to governments.

Gross National Product

the dollar value of production by a country's citizens.

Gross Domestic Product

the dollar value of production within a nation's border.

Labor

the effort of workers.

entrepreneurship

the efforts of entrepreneurs in organizing resources for production taking risk to create new enterprises and innovating to develop new product.

demand curve

the graphical representation of the law of demand. Shows the amount of a good buyers are willing and able to buy at various prices.

nominal GDP

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.

labor force

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.

peak

the highest point of a business cycle.

national income (NI)

the income earned by households and profits earned by firms after subtracting.

disposable personal income

the income of households after taxes have been paid

business cycle

the long-run pattern of growth and recession.

trough

the lowest point of a business cycle

interest

the payment that capital receives in the factor market.

unemployment rate

the percentage of the civilian labor force that is unemployed. The number of persons unemployed divided by the number of persons in the civilian labor force (expressed as a percentage).

exchange rate

the price of a domestic currency in terms of a foreign currency.

Marginal Propensity to Save (MPS)

the proportion of each additional dollar of income that is saved.

marginal propensity to consume (MPC)

the proportion of each additional dollar of income that will go toward consumption expenditures.

economics

the study of scarcity and choice.

market supply curve

the sum of all the quantities of a good supplies by all producers at each price.

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).

trough

the transition point between economic recession and recovery.

demand

the willingness and ability of buyers to purchase a good or service.

total revenue

total revenue (TR) price of a good multiplied by the number of units sold; TR = P*Q.

frictional unemployment

unemployment faced by workers who have lost their jobs because of changing market (demand) conditions & who have transferable skills; unemployment due to the natural frictions of the economy.

structural unemployment

unemployment faced by workers who have lost their jobs because of changing market (demand) conditions & whose skills don't match the requirements of available jobs.

cyclical unemployment

unemployment that reflects changes in the business cycle; the difference between the official unemployment rate & the natural rate of unemployment.

substitution effect

when consumers substitute a similar, lower priced product for a product which is relatively more expensive.

elastic demand

when the percent of change in quantity demanded is greater than the percent of change in price; when there is a large change in the quantity of a good demanded, and a small change in price of the good.

unit elastic

when the percent of change in the quantity demanded equals the percent of change in price.

inelastic demand

when the percent of change in the quantity demanded is less than then percent of change in price; when there is a small change in the quantity of a good demanded, and a large change in the price of the good.

depreciation

when the price of one currency falls relative to another currency, the first currency has depreciated relative to the other one.

perfectly elastic

where the demand curve is horizontal, reflecting situation in which any change in price reduces quantity demanded to "0." the result of a competitive market consumers will go elsewhere to purchase the product.

demand curve shifts

will shift either to the left(decrease) in demand, or to the right(increase) in demand; shift is caused by a change in one of the non-price determinates for the good.

Ceteris Paribus

(sayr-iht-us pahr-ih-bos) a Latin phrase meaning "all things constant."

number of 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.

command economy

government officials make decisions about economy.

Phillips curve

graphic representation of an inverse relationship between wage growth (percentage change in price level, such as inflation) and unemployment.

cost-push inflation

inflation created when an increase in the costs of production (wages or raw materials) shifts the short-run aggregate supply (AS) curve to the left; tends to push prices up while reducing the level of real GDP at the same time (stagflation).

demand-pull inflation

inflation that follows from an increase in aggregate demand, which will cause equilibrium real GDP (Y) to increase and the equilibrium price level (P) to increase.

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.

movement along a demand curve

movement up or down a single demand curve, contrasted with movement of the demand curve itself.

real GDP

nominal GDP corrected for inflation; real GDP is calculated using prices from a given base year, which may not be the same as the year being measured or the year in which the calculations are made. Real GDP allows economists to compare changes in production realistically across years, creating a stable price index so that rising prices in general do not increase real GDP.

inelastic

not significantly responsive to changes in price.

market equilibrium

occurs when supply and demand are balanced such that the market price and the quantity exchanged are under no market pressure to change.

depression

period in which a recession becomes prolonged and deep, involving high unemployment.

expansion

period in which the economy moves from a trough to a peak and a real GDP is increasing; also called a boom.


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