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