AP Macroeconomics flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Opportunity cost
- The value of the next-best alternative forgone when a choice is made. It includes both explicit monetary costs and implicit costs such as forgone time or income.
- Production possibilities frontier
- A curve showing maximum combinations of two goods producible with given resources and technology. Points on the curve are efficient; points inside are inefficient; points outside are unattainable.
- Law of demand
- As the price of a good rises, the quantity demanded falls, all else equal. The inverse relationship produces a downward-sloping demand curve.
- Market equilibrium
- The price at which quantity demanded equals quantity supplied. At this price there is neither a shortage nor a surplus, and the market clears.
- Comparative advantage
- The ability to produce a good at a lower opportunity cost than another producer. Specialization according to comparative advantage increases total output and gains from trade.
- Gross domestic product
- The market value of all final goods and services produced within a country's borders in a given period. Intermediate goods and financial transfers are excluded.
- Demand-pull inflation
- Inflation caused by an increase in aggregate demand that pushes output beyond potential, bidding up prices when the economy is near full employment.
- Cost-push inflation
- Inflation resulting from a leftward shift of short-run aggregate supply, such as from higher input prices or supply shocks, raising prices while reducing output.
- Crowding out
- A reduction in private investment caused by government borrowing raising real interest rates. It weakens the expansionary effect of deficit-financed fiscal policy.
- Automatic stabilizers
- Features of the budget that dampen economic fluctuations without new legislation, such as progressive income taxes and unemployment insurance, which rise during recessions.
- Natural rate of unemployment
- The unemployment rate consistent with potential output, comprising frictional and structural unemployment. Cyclical unemployment is zero at this rate.
- Short-run Phillips curve
- A downward-sloping relationship between inflation and unemployment in the short run. It shifts when expectations or supply conditions change.
- Price ceiling
- A legal maximum price. If set below equilibrium it is binding, creating a shortage, reduced quantity supplied, and deadweight loss.
- Price floor
- A legal minimum price. If set above equilibrium it is binding, creating a surplus; a minimum wage above equilibrium raises unemployment.
- Negative externality
- A cost imposed on third parties not reflected in market price, such as pollution. Marginal social cost exceeds marginal private cost, causing overproduction relative to the social optimum.
- Positive externality
- A benefit to third parties not captured in market price, such as education. Marginal social benefit exceeds marginal private benefit, causing underproduction relative to the social optimum.
- Tariff effects
- A tax on imports raises domestic price, increases domestic quantity supplied, reduces imports, transfers surplus to producers and government, and creates deadweight loss.
- Currency depreciation cause
- Higher domestic inflation relative to trading partners, lower real interest rates, or reduced demand for exports tends to depreciate a currency under flexible exchange rates.
- Functions of money
- Money serves as a medium of exchange, a unit of account, and a store of value. These functions reduce transaction costs and facilitate specialization and trade.
- Open-market operations
- Central bank purchases or sales of government securities. Purchases increase bank reserves and the money supply; sales decrease both and raise interest rates.
- Spending multiplier
- The ratio of the change in equilibrium output to a change in autonomous spending, equal to 1 divided by one minus the marginal propensity to consume.
- Tax multiplier
- The change in equilibrium output per dollar change in lump-sum taxes, equal to negative MPC divided by one minus MPC. Its absolute value is one less than the spending multiplier.
- Quantity theory of money
- The classical proposition that money supply changes affect only the price level in the long run, expressed as MV equals PY with velocity and real output fixed.
- Keynesian short-run view
- Because wages and prices are sticky, changes in aggregate demand affect real output and employment in the short run, justifying active stabilization policy.
- Real interest rate
- The nominal interest rate minus the inflation rate, approximating the true cost of borrowing. It drives investment and interest-sensitive consumption decisions.
- Unemployment rate formula
- The number of unemployed persons divided by the labor force, multiplied by 100. The labor force includes employed plus unemployed persons actively seeking work.
- Inflation rate formula
- The percentage change in a price index from one period to the next: current index minus prior index, divided by prior index, times 100.
- Money multiplier
- The maximum expansion of the money supply per dollar of reserves, equal to one divided by the required reserve ratio when banks hold no excess reserves.
- Real GDP calculation
- Nominal GDP divided by the GDP deflator, multiplied by 100. It values current output at base-year prices to remove the effect of price changes.
- Aggregate demand slope
- The downward slope of aggregate demand arises from the wealth effect, the interest-rate effect, and the foreign-trade effect of a change in the price level.
- Long-run aggregate supply
- A vertical curve at potential output showing that in the long run, real GDP depends on resources and technology, not the price level.
- Loanable funds market
- A graph with the real interest rate on the vertical axis. Saving supplies funds and investment demands them; government borrowing shifts supply left, raising the rate.