AP®︎ Macroeconomics: Unit 5 Flashcards
Master key terms and definitions for Unit 5 of AP Macroeconomics – Long–Run Consequences of Stabilization Policies to help you prep for quizzes and the AP exam.
Expansionary Fiscal Policy
Higher government spending and/or lower taxes used to increase aggregate demand.
Higher government spending and/or lower taxes used to increase aggregate demand.
Lower government spending and/or higher taxes used to decrease aggregate demand.
Federal Reserve actions that increase money supply and lower interest rates.
Federal Reserve actions that decrease money supply and raise interest rates.
Federal Reserve tools that change money supply through bond trades, bank reserves, and lending rates.
Using fiscal and monetary policy together shifts aggregate demand to close output gaps.
Policy actions change aggregate demand, real output, the price level, and interest rates.
A recessionary gap where real GDP is below full-employment output.
An inflationary gap where real GDP is above full-employment output.
A model showing the relationship between inflation and unemployment in the short run and long run.
A downward-sloping curve showing an inverse short-run relationship between inflation and unemployment.
A vertical curve at the natural rate of unemployment showing no long-run inflation-unemployment trade-off.
The unemployment rate that exists at full employment and where the long-run curve is located.
Changes in aggregate demand move the economy along the SRPC, changing inflation and unemployment inversely.
Changes in short-run aggregate supply shift the SRPC, changing inflation and unemployment together.
A situation with high inflation and high unemployment, usually caused by an adverse supply shock.
The long-run curve shifts when the natural rate of unemployment changes.
Long-run equilibrium is where SRPC meets LRPC; left is inflationary, right is recessionary.
Rising prices caused by increased aggregate demand, usually with higher real output in the short run.
Rising prices caused by falling short-run aggregate supply from higher input costs or supply shocks.
A self-reinforcing cycle where higher wages raise costs and prices, prompting demands for still higher wages.
In the long run, changes in the money supply affect nominal variables, not real output.
The average number of times a dollar is spent on final goods and services in a period.
States that MV = PY, where money growth mainly changes prices in the long run.
Sustained money growth faster than real output growth causes long-run inflation.
A sustained decrease in the overall price level over time.
The yearly difference between tax revenues and government spending, including transfer payments.
The total accumulated federal debt created when yearly budget deficits require borrowing.
Interest on accumulated debt uses funds that could otherwise support other government priorities.
When tax revenue is below spending, the government borrows funds to finance the gap.
Less private investment slows physical capital formation and can reduce long-run economic growth.
Government borrowing to finance deficits raises real interest rates and reduces interest-sensitive private spending, especially investment; in the short run this can weaken aggregate demand, and in the long run it can slow capital formation and economic growth.
Real GDP divided by population, used to compare average output per person.
The economy's full-employment output when all resources are fully used.
An outward PPC shift matches a rightward LRAS shift because both show higher full-employment output.
A model showing how inputs like labor and capital determine total output.
They are directly related because more workers produce more output, other things equal.
Output per employed worker.
Technology, physical capital per worker, and human capital per worker determine output per worker.
Knowledge and innovation that let workers produce more output with the same resources.
Human-made tools, equipment, and structures used to produce goods and services.
Workers' education, skills, training, and health that increase productivity.
Output per person rises as physical capital per person and human capital per person increase.
More saving finances more investment in capital, supporting long-run economic growth.
An increase in real GDP per capita over time, measured by its percent change.
Government spending on education and training that increases worker productivity and labor quality.
Government spending on transportation, utilities, and communication systems that improves productive efficiency.
Government actions that increase the number of people working or seeking work, raising output.
Tax and spending policies designed to increase incentives to work, save, invest, and produce.
Supply-side targets SRAS and LRAS; demand-side targets aggregate demand to change output and prices.
Lower taxes can raise saving, increase loanable funds, lower real interest rates, and boost investment.
A tax reduction for firms that purchase new capital, encouraging business investment.
Government support for research, technology, and patents increases productivity and long-run growth.
Policies that lower business taxes and rules reduce costs and increase production incentives.
These policies shift SRAS and LRAS right, raising output and expanding potential GDP.
