Macroeconomics Exam Vocabulary Flashcards

Comprehensive key vocabulary flashcards grounded strictly in the Macroeconomics Study Guide, covering core economic principles, market supply and demand, GDP accounting, money and banking, and labor markets.

Scarcity

The core economic condition where resources are limited while desires are unlimited, requiring choices that carry an opportunity cost.

Opportunity Cost

The value of the next-best forgone alternative when a choice is made.

Sunk Costs

Costs that are already paid and cannot be recovered; they should be ignored in economic decision-making.

Rationality

The preference structure where choices are comparable (completeness) and consistent (transitivity), leading individuals to select the best feasible option.

Optimization

Choosing the option that maximizes net benefit; for continuous choices, this occurs where marginal benefit equals marginal cost ($\text{MB} = \text{MC}$).

Ceteris Paribus

A Latin phrase meaning "all else equal," used in economic models to simplify complex interdependency.

Pareto Improvement

A change or trade that makes at least one person better off without making anyone worse off.

Equilibrium

A state with no internal tendency to change.

Exogenous Force

A force coming from outside an economic system that can alter or move the equilibrium.

Positive Claim

A claim about what is or what will happen that can be tested empirically.

Normative Claim

A claim about what should happen that reflects subjective values or goals.

Traditional Economy

An economic system guided by custom, social norms, or religion, where social obligations strongly constrain resource use.

Centrally Planned Economy

An economic system in which government officials direct production, allocate resources, determine distribution, and own factors of production.

Market Economy

An economic system in which decentralized buyers and sellers coordinate through prices and households own factors of production.

Mixed Economy

A real-world economy that incorporates elements of traditional, centrally planned, and market systems.

Institutions

Laws, common practices, organizations, and social norms that shape economic outcomes.

Private Property Rights

Enforceable rights including the right to use property, earn income from it, and transform it.

Demand

The relationship between price and the quantity buyers want to purchase; represented as a complete curve on a graph.

Law of Demand

The principle stating that as price increases, quantity demanded decreases.

Supply

The relationship between price and the quantity sellers want to provide; represented as a complete curve on a graph.

Law of Supply

The principle stating that as price increases, quantity supplied increases.

Market Equilibrium

The price-quantity pair where quantity supplied equals quantity demanded, occurring at the graphical intersection of supply and demand.

Surplus (Excess Supply)

A market condition where price is above equilibrium so quantity supplied exceeds quantity demanded ($\text{Qs} > \text{Qd}$), causing sellers to cut prices.

Shortage (Excess Demand)

A market condition where price is below equilibrium so quantity demanded exceeds quantity supplied ($\text{Qd} > \text{Qs}$), causing buyers to bid prices up.

Comparative Statics

An analysis method that compares one equilibrium state before an event with another equilibrium state after it.

Gross Domestic Product (GDP)

The market value of all new, domestically produced, final goods and services in a given period ($\text{Y} = \text{C} + \text{I} + \text{G} + \text{NX}$).

Consumption (C)

Expenditure component of GDP including new final goods and services bought by households, such as rent and consumer durables.

Investment (I)

Expenditure component of GDP including business capital, new commercial buildings, equipment, new residential construction, and inventory changes.

Government Purchases (G)

Expenditure component of GDP including direct government purchases and the cost of producing public services.

Net Exports (NX)

Expenditure component of GDP calculated as exports minus imports ($\text{NX} = \text{Exports} - \text{Imports}$).

Nominal GDP

GDP measured using current-year prices, which can change due to shifts in both prices and quantities.

Real GDP

GDP measured using fixed base-year prices with current quantities, isolating changes in the quantity of final output.

Ameliorative Production

Economic spending required to deal with problems (such as crime) that increases GDP despite the underlying problem reducing well-being.

Medium of Exchange

A function of money as an item that is generally accepted in trade.

Unit of Account

A function of money as a standard measure in which prices are quoted.

Store of Value

A function of money as an asset that retains purchasing power into the future.

Commodity Money

Money that has an alternative non-monetary use, such as gold or cigarettes.

Representative Money

Money that can be exchanged for a specific commodity at a fixed rate.

Fiat Money

Money that has value solely because people accept it as money.

M1 Money Supply

A narrow money aggregate consisting of highly liquid money: currency plus checking and savings deposits.

M2 Money Supply

A broad money aggregate including M1 plus money market deposits, smaller time deposits, and retail money market mutual funds.

Simple Money Multiplier

The factor by which bank deposits expand in a simplified reserve system, calculated as $\text{Multiplier} = \frac{1}{\text{rr}}$.

Present Value (PV)

The current value of a payment received $t$ periods in the future, given by $\text{PV} = \frac{\text{FV}}{(1 + i)^t}$.

Expected Value

The probability-weighted average outcome of a random event, calculated as $\text{E}[Y] = \Sigma(\text{probability} \times \text{payout})$.

Diminishing Marginal Utility

The principle that each additional unit of a good or dollar provides less additional satisfaction than the previous one.

Risk Aversion

The preference for a certain payout over a risky payout with the same expected value.

Risk Premium

The extra expected return required to induce an investor to hold a risky asset rather than a safer asset.

Fisher Equation

The equation stating that nominal interest rate equals real interest rate plus expected inflation ($i = r + \pi^e$).

Current Yield

The annual return on a bond calculated as $\text{Current Yield} = \frac{\text{Annual Coupon Payment}}{\text{Current Bond Price}}$.

Tax Wedge

A per-unit tax gap that separates the price paid by buyers from the price received by sellers.

Average Tax Rate

Total taxes paid divided by total income ($\text{Average Tax Rate} = \frac{\text{Total Taxes}}{\text{Total Income}}$).

Marginal Tax Rate

The tax rate owed on the next additional dollar earned.

Progressive Tax

A tax system in which the average tax rate increases as income increases.

Regressive Tax

A tax system in which the average tax rate tends to fall as income increases.

Nominal Rigidity

The economic friction where workers strongly resist nominal pay cuts, keeping wages sticky downwards.

Search and Matching

The labor market friction where finding workers and jobs takes time and money, slowing market adjustments.

Policy Kinks

Discontinuities such as benefit cliffs or means-tested benefit losses that raise effective marginal tax rates and discourage small earnings increases.

Laffer Curve

The concept showing that tax revenue can be low at both very low and very high tax rates because high rates significantly shrink the taxed activity.