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AP Macro Unit 2
Part Two
| Term | Definition |
|---|---|
| Stabilization Policy | short term policy used by a national government to combat either recessions (unemployment) or inflation (aka Keynesian Demand-Side economics) |
| Short-run Phillips Curve | illustrates relationship between rates of inflation and unemployment; tend to move in opposite directions; implies a short term trade-off in order to reduce unemployment inflation may rise and in order to reduce inflation the unemployment rate may rise |
| Expansionary Policies | goal is to increase aggregate demand |
| Contractionary Policies | used to combat inflation |
| Economic Growth Policy | long term government actions/policies and other factors that can create an increased potential in the economy; economistic who focus on the long run often do not believe that there is an inherent trade-off between inflation and unemployment |
| Long run Aggregate Supply | Potential GDP and Full-Employment GDP; the shift to the right shows an increase in LRAS and this illustrates an increase in long term economic growth; shift to the left reflects decrease in long term economic growth |
| Long run Phillips Curve | illustrates that in the long-run there is no relationship between the rates of inflation and unemployment. |
| Natural Rate of Unemployment | a shift to the left/lowering the ______ would illustrate an increase in long term economic growth; shift to the right/raise ______ would illustrate a decrease in long term economic growth |
| Capital Stock (AKA Loanable Funds) | refers to the amount of money that is available for businesses/investors to borrow and invest |
| Capital Formation | includes capital stock (loanable funds) but also includes how “easy” it is to borrow money (increases when interest rates decrease) |
| National Sales Tax (VAT) | consumption tax. Many European countries call this a value added tax. |
| Crowding-out effect | increased government borrowing to finance the deficit increases the demand for Loanable Funds, and this raises Real Interest Rates; caused by increased deficits; helps in the short-run but harms in the long-run |
| Crowding-in effect | Less government borrowing reduces the demand for Loanable Funds and lowers long term Real Interest Rates; caused by reduced deficits |
| Targeted Tax Cuts/Tax Credits | businesses only receive the tax cuts if they invest in technology or human capital; governments can also spend more on education; increases productivity and which increases long term economic growth |
| Inflation | general rise in the level of prices (price level) |
| Consumer Price Index (CPI) | Most often used (most popular) measurement of inflation |
| Index Number | measures price changes in a selected (sample) group of products |
| Market Basket | name given to the selected group of products that are used to track the progress of inflation in an economy or specific market (measures changes in the value of money over time) |
| “Index Number Problem” | does not measure price changes for all products (in the case of the CPI does not measure how inflation is affecting all groups); groups who do not buy the Market Basket as much as others (senior citizens) create a limitation in data |
| GDP Deflator | measures price changes in all products during a given year; broadest and most historically accurate measure of inflation; used to create “real” data for historical purposes; nominal GDP divided by real GDP x 100 |
| Core CPI | CPI - prices for energy and food; these are taken out because they can be unstable in the short run this is the measure of inflation; used by the Federal Reserve |
| Chained CPI | another measurement of inflation; tends to be the lowest estimate of inflation because it assumes the “substitution effect” in its calculation; typically 1% lower than the official CPI used by the federal government |
| Demand-side Inflation (AKA Demand-Pull Inflation) | inflation that is caused by a significant increase in aggregate demand |
| Supply-side inflation (AKA Cost-Push Inflation) | inflation that is caused by a significant decrease in aggregate supply; can be caused by supply shocks |
| Hyperinflation | extremely high rates of inflation over very short periods of time; typically happens only in less developed countries with weak Central Banks (ex. 25% inflation per day for a two week period as in Brazil) |
| Stagflation | high rates of inflation combined with high rates of unemployment (aka low GDP growth) |
| Expected (Anticipated) Inflation | what economists predict inflation will be over various periods of time (businesses, banks, unions, etc make decisions for the future based on these predictions) |
| Actual Inflation | what the rate of inflation actually is over the periods of time that economists predict inflation |
| Menu Costs | costs businesses have when they raise their prices (first associated with restaurants); costs they incur when they raise prices (hurt by unexpected inflation) |
| Nominal Interest Rates | what the lender charges borrowers; anticipated inflation + rate of return (the real interest rate the lender wants to receive); not adjusted for inflation |
| Real Interest Rates | nominal interest rate - actual rate of inflation; after the fact calculation |
| Deflating | refers to the process of adjusting statistics for the effects of inflation |
| Unemployment Rate | percentage of the civilian labor force that is not working but still looking for full-time work |
| Civilian Labor Force (CLF) | 16 or older (non-military) who are working full-time, or who are trying to work full-time |
| Discouraged Workers | individuals not working but who are no longer actively looking for full-time work because they do not believe there are jobs available for them; they are not counted in the CLF hence they are not counted in the unemployment rate |
| Underemployment (Involuntary Part-time workers) | refers to people who are working part-time but want/need full-time work; they are counted as employed but are not making the money they need |
| Frictional Unemployment | naturally/regularly occurring unemployment; can refer to people who are “in-between jobs” and workers who are “seasonally unemployed” |
| Cyclical Unemployment | refers to workers who have lost their jobs as a result of a recession; often referred to as “laid-off”; workers who expect to get rehired as the economy recovers |
| Structural Unemployment | workers who have lost their jobs due to major changes in the economy or major changes in their industry; workers whose skills are no longer needed; these workers will typically not return to the job they lost |
| Full Employment | what the unemployment rate is predicted to be when the economy is at its peak; the rate is approximately 3.5-4%; equals the amount of typical frictional and structural unemployment which always exist to some degree |
| Labor Force Participation Rate | amount of people actually in the labor force divided by amount of people potentially in the labor force times 100 |
| Factors that Affect Economic Growth | changes in the size of the labor force, changes in capital stock/loanable funds and capital formation, changes in productivity |
| Real Interest Rates | long term interest rates adjusted for inflation |
| Changes in the size of the Labor Force | Increase will increase long term economic growth (more products can be produced) |
| Changes in Capital Stock/Loanable Funds/Capital Formation | Increases will increase long term economic growth (leads to more investment in capital goods/physical capital and increases the production of products) |
| National Savings | the sum of private (households) and public (government) saving; aka money not spent |
| Changes in National Savings | increase will increase the capital stock/loanable funds/capital formation which increases long term economic growth |
| Affect on "Crowding Out Effect" on Capital Stock/Loanable Funds/Capital Formation | reduces Capital Stock/ Loanable Funds, and reduces Capital Formation by raising Real Interest Rates and making it more costly to borrow money for Investment in the long run. |
| Affect on "Crowding In Effect" on Capital Stock/Loanable Funds/Capital Formation | This increases Capital Stock/Loanable Funds, and increases Capital Formation by lowering long term Real Interest Rates and making it less costly to borrow money for Investment. |
| Changes in Productivity | Increases will increase long term economic growth |
| Unanticipated Inflation | when actual inflation is higher than expected inflation; people with fixed incomes, fixed return on investments, and fixed return on savings are hurt |
| Natural Rate of Unemployment | Frictional unemployment + structural unemployment |
Created by:
rcooke
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