#separator:tab #html:false #tags column:4 Scarcity Limited resources against unlimited wants tp-ap-macroeconomics Opportunity cost The value of the next best alternative given up tp-ap-macroeconomics Production possibilities curve Graph of the maximum combos of two goods an economy can produce tp-ap-macroeconomics Comparative advantage Producing a good at a lower opportunity cost tp-ap-macroeconomics Absolute advantage Producing more of a good with the same resources tp-ap-macroeconomics Gross domestic product Market value of final goods and services produced within a country in a year tp-ap-macroeconomics Nominal GDP GDP measured at current prices tp-ap-macroeconomics Real GDP GDP adjusted for price changes tp-ap-macroeconomics GDP formula C + I + G + (X - M) tp-ap-macroeconomics Consumption Household spending on goods and services tp-ap-macroeconomics Investment Spending on capital goods, construction and inventories tp-ap-macroeconomics Net exports Exports minus imports tp-ap-macroeconomics Business cycle Alternating expansions and contractions in economic activity tp-ap-macroeconomics Recession A significant decline in economic activity tp-ap-macroeconomics Unemployment rate Percent of the labor force that is jobless and looking for work tp-ap-macroeconomics Labor force People employed plus those actively seeking work tp-ap-macroeconomics Frictional unemployment Short-term joblessness while changing jobs tp-ap-macroeconomics Structural unemployment Joblessness due to a mismatch of skills and available jobs tp-ap-macroeconomics Cyclical unemployment Joblessness caused by downturns tp-ap-macroeconomics Natural rate of unemployment Sum of frictional and structural unemployment tp-ap-macroeconomics Inflation A sustained rise in the general price level tp-ap-macroeconomics Consumer price index Measures the cost of a typical basket of goods over time tp-ap-macroeconomics Deflation A sustained fall in the general price level tp-ap-macroeconomics Disinflation A slowdown in the rate of inflation tp-ap-macroeconomics Real interest rate Nominal rate minus the inflation rate tp-ap-macroeconomics Aggregate demand Total spending on domestic output at each price level tp-ap-macroeconomics Aggregate supply Total output firms will produce at each price level tp-ap-macroeconomics Short-run aggregate supply Upward-sloping because some prices and wages are sticky tp-ap-macroeconomics Long-run aggregate supply Vertical at full-employment output tp-ap-macroeconomics Wealth effect Spending changes as the value of assets changes tp-ap-macroeconomics Multiplier The factor by which an initial spending change affects GDP tp-ap-macroeconomics Marginal propensity to consume Share of extra income spent tp-ap-macroeconomics Spending multiplier formula 1 / (1 - MPC) tp-ap-macroeconomics Fiscal policy Government spending and tax changes tp-ap-macroeconomics Expansionary fiscal policy More spending or lower taxes to boost output tp-ap-macroeconomics Contractionary fiscal policy Less spending or higher taxes to cool the economy tp-ap-macroeconomics Automatic stabilizer Taxes and benefits that adjust with the economy without new laws tp-ap-macroeconomics Budget deficit Spending exceeds revenue in a year tp-ap-macroeconomics National debt Total accumulated borrowing tp-ap-macroeconomics Crowding out Government borrowing raising interest rates and reducing private investment tp-ap-macroeconomics Money Anything accepted as a medium of exchange tp-ap-macroeconomics Functions of money Medium of exchange, unit of account and store of value tp-ap-macroeconomics M1 Currency, checkable deposits and similar liquid money tp-ap-macroeconomics Fractional reserve banking Banks keep a part of deposits and lend the rest tp-ap-macroeconomics Required reserve ratio Fraction of deposits banks must hold in reserve tp-ap-macroeconomics Money multiplier 1 / required reserve ratio tp-ap-macroeconomics Excess reserves Reserves beyond what is required tp-ap-macroeconomics Federal Reserve The US central bank tp-ap-macroeconomics Federal funds rate Rate banks charge each other for overnight loans tp-ap-macroeconomics Open market operations Fed buying or selling government securities to change reserves tp-ap-macroeconomics Discount rate Rate the Fed charges banks for loans tp-ap-macroeconomics Reserve requirement Fed rule on how much banks must hold in reserve tp-ap-macroeconomics Expansionary monetary policy Lower interest rates and a larger money supply tp-ap-macroeconomics Contractionary monetary policy Higher interest rates and a smaller money supply tp-ap-macroeconomics Quantitative easing Large-scale asset purchases to lower long-term rates tp-ap-macroeconomics Money market Graph of money demand and money supply determining the nominal interest rate tp-ap-macroeconomics Loanable funds market Where savers supply funds and borrowers demand them, setting the real rate tp-ap-macroeconomics Phillips curve Shows a short-run tradeoff between inflation and unemployment tp-ap-macroeconomics Stagflation High inflation with high unemployment tp-ap-macroeconomics Supply shock A sudden change in production costs that shifts aggregate supply tp-ap-macroeconomics Economic growth Increase in real output over time tp-ap-macroeconomics Productivity Output per unit of input tp-ap-macroeconomics Human capital Skills and knowledge of workers tp-ap-macroeconomics Physical capital Machines, buildings and tools tp-ap-macroeconomics Rule of 70 Years to double = 70 divided by the growth rate percent tp-ap-macroeconomics Exchange rate The price of one currency in terms of another tp-ap-macroeconomics Appreciation A currency gaining value tp-ap-macroeconomics Depreciation A currency losing value tp-ap-macroeconomics Balance of payments Record of a country's transactions with the world tp-ap-macroeconomics Current account Trade in goods and services plus income flows tp-ap-macroeconomics Capital account Flows of financial assets and investment tp-ap-macroeconomics Tariff A tax on imports tp-ap-macroeconomics Quota A limit on the quantity of imports tp-ap-macroeconomics Trade deficit Imports exceed exports tp-ap-macroeconomics Foreign exchange market Where currencies are traded tp-ap-macroeconomics Laffer curve Idea that very high tax rates can reduce revenue tp-ap-macroeconomics Recessionary gap Real GDP below full-employment output tp-ap-macroeconomics Inflationary gap Real GDP above full-employment output tp-ap-macroeconomics Self-correction Wages and prices adjusting over time to return to full employment tp-ap-macroeconomics Supply-side economics Policies aimed at boosting production, such as tax cuts tp-ap-macroeconomics Keynesian economics View that government spending can stabilize demand tp-ap-macroeconomics Monetarism View stressing the money supply as key to inflation tp-ap-macroeconomics Neutrality of money Money supply changes affect only prices in the long run tp-ap-macroeconomics Velocity of money How often a unit of money changes hands in a year tp-ap-macroeconomics Equation of exchange MV = PQ tp-ap-macroeconomics Fisher effect Nominal interest rate rises one-for-one with expected inflation tp-ap-macroeconomics Liquidity How easily an asset becomes cash tp-ap-macroeconomics Transfer payment A payment with no good or service in return tp-ap-macroeconomics Progressive tax Higher earners pay a larger share of income tp-ap-macroeconomics Regressive tax Lower earners pay a larger share of income tp-ap-macroeconomics Taylor rule A guide linking interest rates to inflation and output tp-ap-macroeconomics Leakage Money leaving the circular flow: saving, taxes, imports tp-ap-macroeconomics