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AP Macro Unit 3
| Term | Definition |
|---|---|
| Physical Capital/Capital Goods | technology, factories, machines, etc |
| Inventory | stocks of goods and raw materials held to satisfy future sales; products available for sale |
| Government Purchases | purchases of goods and services does not include transfer payments |
| Transfer Payments | counted when people spend them as consumption |
| Disposable Income | household income after taxes (the amount of households have to potentially spend); households with consume/spend it or save it |
| Marginal propensity to consume (MPC) | the percentage of additional disposable income that is consumed by households; additional consumption divided by additional disposable income |
| Marginal propensity to save (MPS) | the percentage of addition disposable income that is saved by households; additional savings divided by additional disposable income |
| Wealth | money assets beyond regular income (ex. real estate/homes and financial investments like stocks and bonds) |
| Income | wages and salary |
| Real Income Effect | as the price level rises, households will spend a lower percentage of their disposable income because they will have less real income and vice versa |
| Multiplier Effect | the amount of money available to spend in the economy increases, overall effect on aggregate demand/GDP will be greater than initial additional amount made available in the economy |
| Expenditure Multiplier | shows what impact a change in autonomous spending will have on total spending and aggregate demand in the economy |
| Investment | includes business spending on capital goods/physical capital, new spending on inventory, and households purchasing new homes |
| Net Exports | the money value of exports minus the money value of imports |
| Exchange Rates | how much of one currency can be bought for each unit of another currency |
| Fiscal Policy | tax policy, government spending policy, and transfer payments |
| Monetary Policy | FED/central bank’s control of the money supply and/or interest rates |
| Economies with Abundant Reserves | economies that have central banks that focus on changing interest rates directly |
| Economies with Limited Reserves | economies that have central banks that focus on changing the money supply as a way to indirectly influence interest rates |
| Administrative Rates | interest rates under the control of the FED |
| Reserve Interest Rate | the interest rate the FED pays on reserves (savings rate for banks) |
| Discount Rate | interest rate the FED charges member banks for loans and cash advances |
| Expansionary Policy | this type of monetary policy is used to lower interest rates in response to a recession |
| Contractionary Policy | this type of monetary policy is used to raise interest rates in response to inflation |
| Open Market Operations | refers to the buying and selling of government securities between a central bank and its member banks |
| Policy Rate | a short term rate (often overnight) that banks charge one another to borrow funds |
| Federal Funds Rate (aka “Overnight Rate”) | the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis |
| Recessionary Gap | occurs when a country’s real GDP is lower than its GDP at full employment |
| Inflationary Gap | occurs when a country’s actual GDP is greater than the potential GDP |
| Subsidies | payments made by the government to businesses who produce certain products |
| Deregulation | reducing or eliminating government regulation on businesses; lowers the cost of production and increase aggregate supply |
| Productivity | the average amount of products produced by one worker (average number); can be improved through technology and human capital |
| Human Capital | employee education and training |
| Cost of Production | an increase will cause a drop in aggregate supply; a decrease will cause an increase in aggregate supply |
| Factors that Change Consumption | changes in real wealth, changes in real income, future expectations |
| Factors that Change Investment | interest rates (lower rates increases investment) and business confidence (degree of confidence in the future) |
| Positive Supply Shocks | something that occurs that causes a lot more products to be produced. (Significant increase in Aggregate Supply) |
| Negative Supply Shocks | something that causes a significant drop in the production of productions (Aggregate Supply) |
Created by:
rcooke
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