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AP Macro Unit 5
| Term | Definition |
|---|---|
| Transactional Motivation | a desire to hold cash in order to conduct cash based transactions; the more transactions involving final, new goods and services requires more money |
| Precautionary Motivation | people often demand money as a precaution against an uncertain future; unexpected expenses such as medical or car repair bills, often require immediate payment |
| Speculative Motivation | arises in situation where holding money is perceived to be less risky than the alternative of lending the money of investing it in some other asset |
| Crowding Out Effect | as deficits increase the federal government borrows more money which increases the demand for loanable funds and tends to raise real interest rates |
| Crowding In Effect | lower deficits cause the federal government to borrow less money which decreases the demand for loanable funds and tends to reduce real interest rates |
| Policy Lags | the amount of time between when a policy decision is made and actually implemented |
| Expenditure Lags | the amount of time between when a policy is implemented (begins) and has an effect on the economy |
| Progressive Taxes | also known as graduated taxes; tax rates increase as income increases |
| Proportional Taxes | also known as flat taxes; tax rates do not change as income increases |
| Regressive Taxes | not actually a tax rate but a tendency of certain proportional taxes to hurt lower incomes more than higher incomes; occurs when lower incomes pay a higher percentage of their incomes towards a tax than do higher incomes |
| Payroll Taxes | social security taxes; the cap on social security taxes is approximately 150,000 which makes it regressive |
| Value Added Taxes | aka fair tax; tax added to the additional value added to a product at each stage of production |
| Tax Base | the monetary value of what a particular tax can tax (ex. value of a property in a city is the tax base for its property tax) |
| Capital Gains Tax | tax paid on money made from investments |
| Excise Tax | taxes charged to businesses on goods and services (as opposed to sales taxes which consumers pay) |
| “Sin” Taxes | specific excise taxes on things like alcohol and tobacco products |
| Tariffs | taxes on imported products |
| Luxury Tax | taxes on expensive/non-essential products (ex. certain cars and luxury boats) |
| Estate Tax | tax on inherited wealth |
| Fixed Taxes | tax revenue changes little as the economy changes (property taxes are more fixed than variable) |
| Variable Taxes | tax revenue changes significantly as the economy changes (sales taxes are more variable than fixed) |
| Transfer Payments | federal spending; no goods and services in return; social security and covid 19 payments |
| Automatic Stabilizers | automatically increases the money available to households during a recession and reduces the amount of money available to households when inflation is a problem |
| Monetarism | classical economics belief that the best way to gradually grow the economy in the long run is through slow steady growth in the money supply |
| Velocity | speed at which money circulates through the economy; it measures the number of times each dollar is used in transactions in a given year (monetarists believe that velocity is constant in the long run) |
| Quantity Theory of Money | belief that when the money supply grows too fast the value of the US dollar drops and this can cause higher rates of inflation |
| Equation of Exchange | M (money supply) x V (velocity) = nominal GDP |
| Fiscal Year | 12 month budget period; federal government (october 1 - september 30) |
| Budget Deficit | occurs when a money going out (spending) exceeds money coming in (revenue) during a defined period |
| Budget Surplus | when revenues exceed expenditures |
| National Debt | accumulated deficits (deficits + interest since the beginning of the nation) |
| Debt Ceiling | legal limit of the national debt |
| Treasury Bills | a short-term debt obligation backed by the US treasury department with a maturity of one year of less |
| Treasury Notes | a US government debt security with a fixed interest rate and maturity between 2 and 10 years |
| Treasury Bonds | a fixed rate US government debt security with a maturity of 20 or 30 years |
| Real Deficits | the measurement of debt or deficit adjusted for inflation |
| Nominal Deficit | the measurement of debt or deficit not adjusted for inflation |
| Deficit/Debt as a % of GDP | compares deficits to a nation’s ability to pay for it |
| Per Capita Deficit/Debt | measures the per person burden |
| Short Run Phillips Curve | illustrates the historical relationship between the rate of inflation and unemployment rate (they move in opposite directions, inversely related) |
| Long Run Phillips Curve | illustrates that in the long run changes in the rate of inflation have no effect on the long term unemployment rate |
| Natural Rate of Unemployment | the unemployment rate that persists in a well functioning, healthy economy that is considered to be at full employment |
| Rational Expectations | if workers believe prices will be rising in the future they will demand that their wages keep pace with the higher cost of living; also assumes that in the long run wages will keep pace with inflation |
| COLA (Cost of Living Adjustments) | an increased percentage of pay set by the social security administration to help beneficiaries and their families afford basic needs, such as housing, food, and transportation, based on current market conditions |
| Indexing | wages automatically rise with inflation |
| Demand Pull Inflation (Demand Side) | inflation caused by increases in aggregate demand and typically causes expansionary policy |
| Cost Push Inflation (Supply Side) | inflation caused by declines in aggregate supply especially caused by increases in cost of production (causes are typically negative supply shocks) |
| Flexible Wages | as as economy expands, wages will rise easily as prices rise, and as prices rise so will wages |
| Sticky Wages | the keynesian belief that as the economy expands (GDP rises) wages will go up only slowly and prices will rise faster than wages |
| Flexible Prices | in recessions, prices will begin to drop to the point where that increases aggregate demand and cure recession, in severe inflation, prices will rise to the point where aggregate demand will be reduced and this will correct the inflation |
| Sticky Prices | the sellers (or buyers) of certain goods are reluctant to change the price despite changes in input cost or demand patterns |
Created by:
rcooke
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