AP Macroeconomics Unit 5: Stabilization Policies and Long-Run Growth

Phillips Curve

Represents the short-run trade-off between inflation and unemployment.

Inverse Relationship

The concept that as unemployment decreases, inflation increases in the short run.

AD/AS Model

The model showing the interaction between Aggregate Demand and Aggregate Supply.

Demand-Pull Inflation

Occurs when an increase in Aggregate Demand causes prices to rise.

Cost-Push Inflation

Occurs when rising production costs lead to an increase in prices.

Stagflation

The combination of high inflation and high unemployment.

Natural Rate of Unemployment (NRU)

The level of unemployment consistent with a stable economy.

Monetary Neutrality

The idea that changes in the money supply only affect nominal variables, not real variables.

Quantity Theory of Money

The theory stating that money supply is the main determinant of price level stability.

Equation of Exchange

M * V = P * Y; relates money supply to price level and GDP.

Velocity of Money

The frequency at which money is spent in the economy.

Budget Deficit

Occurs when government spending exceeds tax revenue in a fiscal year.

National Debt

The accumulation of all past government deficits minus surpluses.

Cyclical Deficit

A deficit caused by a recession, resulting from lower tax revenues.

Structural Deficit

A deficit that exists even when the economy is at full employment.

Crowding Out

The reduction in private investment due to increased government borrowing.

Loanable Funds Market

A market where borrowers and lenders interact to determine interest rates.

Real Interest Rate

The nominal interest rate adjusted for inflation.

Production Possibilities Curve (PPC)

A graph that shows the maximum feasible outputs of two goods.

Long-Run Aggregate Supply (LRAS)

The total output an economy can produce when utilizing all resources efficiently.

Aggregate Production Function

Models how an economy's output depends on its inputs.

Physical Capital

Tools, machinery, and buildings used to produce goods and services.

Human Capital

The skills, knowledge, and experience of workers.

Technology/Productivity

The efficiency in the use of inputs to produce outputs.

Investment Tax Credits

Tax incentives to encourage firms to invest in new technology.

Research & Development (R&D) Grants

Funding to promote innovation and technological advancement.

Property Rights

Legal protections for individuals to own and profit from their inventions.

Infrastructure

Basic physical systems of a country, such as transportation and communication.

Debt-to-GDP Ratio

A measure of a country's debt compared to its economic output.

Adverse Supply Shock

An unexpected event that increases production costs and reduces output.

Inflation Expectations

The anticipations of future inflation rates by consumers and investors.

Aggregate Demand (AD)

The total demand for goods and services within an economy.

Aggregate Supply (AS)

The total supply of goods and services produced within an economy.

Nominal GDP

The total value of all goods and services produced at current prices.

Real GDP

The value of all produced goods and services, adjusted for inflation.

Expansionary Fiscal Policy

Government policy aimed at increasing economic activity through spending.

Equilibrium Interest Rate

The interest rate at which the quantity of loanable funds supplied equals the quantity demanded.

Private Investment

Business spending on capital goods necessary for production.

Economic Growth

A sustained increase in the production of goods and services in an economy.

Nominal Variables

Economic measures not adjusted for inflation, such as nominal interest rates.

Real Variables

Economic measures adjusted for inflation, such as real interest rates.

Bond Prices

The market price of bonds, which move inversely with interest rates.

Fiscal Year

A year as reckoned for taxing or accounting purposes.

Supply-Side Economics

Economic theory that advocates reducing taxes and decreasing regulation to stimulate growth.

Automatic Stabilizers

Economic policies and programs that automatically help counter fluctuations.

Economic Stabilization

Policies aimed at minimizing economic volatility and maintaining growth.

Nominal Interest Rate

The stated interest rate on a loan, not adjusted for inflation.

Shift in Phillips Curve

Changes in the curve due to supply shocks or inflation expectations.

Short-Run Phillips Curve (SRPC)

Illustrates the trade-off between inflation and unemployment in the short term.