AP Macroeconomics Exam GRADE A+ SOLUTIONS

aggregate demand curve a curve depicting the relationship between real GDP demanded (i.e., expenditures) and the price level in the economy; the aggregate demand curve slopes downward from left to right. aggregate supply curve a curve defining the relationship between real production and price level. business cycles fluctuations in real GDP around the trend value; also called economic fluctuations. consumer surplus the difference between the maximum price a consume is (or would be) willing to pay and the price he or she actually pays. cost-push inflation inflation created when an increase in the costs of production (wages or raw materials) shifts the short-run aggregate supply (AS) curve to the left; tends to push prices up while reducing the level of real GDP at the same time (stagflation). cyclical unemployment unemployment that reflects changes in the business cycle; the difference between the official unemployment rate & the natural rate of unemployment. demand-pull inflation inflation that follows from an increase in aggregate demand, which will cause equilibrium real GDP (Y) to increase and the equilibrium price level (P) to increase. depreciation when the price of one currency falls relative to another currency, the first currency has depreciated relative to the other one. depression period in which a recession becomes prolonged and deep, involving high unemployment. elastic significantly responsive to a change in price. exchange rate the price of a domestic currency in terms of a foreign currency. expansion period in which the economy moves from a trough to a peak and a real GDP is increasing; also called a boom. expansionary fiscal policy enacted when the government deliberately increases its deficit to stimulate the economy; the government increases its spending (increases G), cuts taxes (decreases T), or both, and stimulates the economy by expanding aggregate demand (AD). expansionary monetary policy monetary policy methods by which the Fed aims to increase the money supply and lower interest rates, thereby creating an increase in output; in pursuit of expansionary policy goals, the Fed can lower the required reserve ratio, lower the discount rate, or purchase government securities on the open market. expenditure approach a way of measuring the GDP by adding up all spending on final goods and services during a given year. fiscal policy changes, adjustments, and strategies that the governments implements in spending or taxation to achieve particular economic goals. frictional unemployment unemployment faced by workers who have lost their jobs because of changing market (demand) conditions & who have transferable skills; unemployment due to the natural frictions of the economy. Gross Domestic Product the dollar value of production within a nation's border. Gross National Product the dollar value of production by a country's citizens. hyperinflation a very high rate of inflation, under which prices go up very rapidly, often more than 1,000 percent in a year. This causes money to become a poor store of value. import quotas restrictions on the quantity of a good that can be imported inelastic not significantly responsive to changes in price. inferior good a good for which there is less demand as income rises; a good the demand for which falls as income rises and rises as income falls; consumer income rises while demand decreases. inflation an increase in the price level interest the payment that capital receives in the factor market. CONTINUED.....