Macroeconomics All Vocabulary

Scarcity

The concept that resources are limited and forces individuals to make choices.

Macroeconomics

The branch of economics that studies large-scale factors that influence entire economic systems.

Microeconomics

The branch of economics that studies small-scale factors that influence individual producers, consumers, and industries.

Factors of Production

The resources required to produce goods and services, including entrepreneurship, capital, land, and labor.

Capital

Man-made tools used in the production of goods and services.

Entrepreneurship

The act of combining factors of production to create new goods and services.

Labor

Workers involved in the production of goods and services.

Land

Natural resources used in the production of goods and services.

Market

Any place where voluntary exchange of goods and services occurs between buyers and sellers.

Incentive

Something that motivates a person to take action, can be positive or negative.

Capitalism/Free Market/Free Enterprise

An economic system where supply and demand dictate production and distribution.

Communism/Centrally Planned/Command

An economic system where government planners control production and distribution.

Socialism/Mixed

An economic system with a mix of government and private control of production and distribution.

Ceteris Paribus

A Latin phrase meaning "all else remains constant," used as a simplifying assumption in economics.

Efficient

When resources are used in a way that maximizes production and minimizes waste.

Inefficient

When resources are not fully utilized, resulting in missed opportunities in production.

Opportunity Cost

The value or utility of the next best alternative that is sacrificed when making a decision.

Equilibrium

A state of balance where supply and demand are equal in a market.

Elasticity

The flexibility of production or consumption decisions in response to changes in market price.

Surplus

When the quantity supplied of a good or service exceeds the quantity demanded.

Shortage

When the quantity supplied of a good or service is less than the quantity demanded.

Producer Surplus

The benefit that producers receive when they sell goods at the market price.

Consumer Surplus

The benefit that consumers receive when they buy goods at the market price.

Deadweight Loss

The loss of benefit to society that occurs when resources are not allocated efficiently.

Total Welfare

The sum of producer and consumer surplus, representing the total benefit to society.

Gross Domestic Product (GDP)

The total value of all final goods and services produced within a country in a given period of time.
Consumer Spending + Gross Private Investment + Government Spending + (Exports - Imports)

Aggregate

A whole that is combined of many separate parts (“Everything put together”)

Real

Measured in unchanging, fixed prices (i.e., “adjusted for inflation”)

• ex., Real Gross Domestic Product, Real wages

Nominal

Measured in current prices. (i.e., “not adjusted for inflation”)

• ex. Nominal Gross Domestic Product, Nominal wages

Real GDP Per Capita

A measure of the level of production in a country divided by the population.

Inflation

A steady increase in the prices of goods and services over time.

• ______ Rate = ((Price 2 - Price 1) / Price 1) x 100

Cost Push Inflation

Higher input costs cause businesses to increase prices of goods and services

Demand Pull Inflation

Higher demand for products causes businesses to increase prices (law of supply).

Disinflation

A slowing in the rate of inflation. (i.e., “Prices are still rising, just not as rapidly as before”)

ex. last year, the rate of inflation was 5%, this year the rate of inflation is 3%

Deflation

A negative inflation rate where prices are lower than before.

GDP Deflator

A measure of the level of prices of all new, domestically produced, final goods and services in an economy.

• Price index that measures price inflation or deflation, and is calculated using nominal GDP and real GDP.

Consumer Price Index (CPI)

A measure of the level of prices of a fixed market basket of goods and services commonly purchased by households.

Spending Multiplier

Represents the multiple by which GDP changes in response to changes in government expenditures and/or investment.

The Business Cycle

A graphic representation of changes in real GDP over time.

Expansion/Recovery

A sustained increase in real GDP over time.

Peak

The highest level of real GDP in the business cycle.

• Positive rGDP growth stops

• Unemployment rate stops rising

• Inflation rate stops rising

• End of economic prosperity

Trough

The lowest level of real GDP in the business cycle.

• Negative rGDP growth stops

• Unemployment rate stops rising

• Inflation rate stops falling

• Beginning of economic recovery

Contraction

Negative real GDP growth.

Recession

A contraction that lasts between 6 months to 2 years.

Depression

A contraction that lasts longer than 2 years.

Unemployment

Individuals who are actively seeking work but are not currently employed.

• _____ rate = (unemployed / labor force) x 100

Labor Force

Adult civilians who are either employed or unemployed.

• Over 16

• Not incarcerated

• Not institutionalized

Underemployed Workers

Individuals who are working part-time or in jobs below their skill level.

• Overqualified for their jobs

• Working part time when they wish to work full time

• Working in a job that pays less than they are accustomed to earning

• Ex. An accountant who has to work part time at Whataburger because she can’t find a full time accounting job.

Discouraged Workers

Individuals who have stopped seeking work and are no longer considered unemployed.

• When they stop seeking work, they drop out of the labor force

• They are no longer considered unemployed statistically

Aggregate Price Level

The overall price level faced by households.

Aggregate Output

The total amount of final goods and services produced in a country.

Aggregate Demand (AD)

The relationship between the aggregate price level and the quantity of aggregate output demanded.

Wealth Effect (Real Balances Effect)

Changes in the aggregate price level influence the purchasing power of consumers.

Interest Rate Effect

A rise in the aggregate price level causes interest rates to increase, which has a negative effect on business investment.

Fiscal Policy

Changes in government spending or taxes that are designed to affect overall (aggregate) spending.

Aggregate Supply

Shows the relationship between the aggregate price level (CPI) and aggregate output (real GDP) that producers are willing and able to supply.

Nominal Wage

The dollar amount earned by workers without adjusting for inflation.

Sticky Wages

Due to contracts and informal agreements, nominal wages are slow to adjust when the aggregate price level changes.

Short-Run

A period of time when input prices are not flexible (sticky) and do not adjust to the aggregate price level. Usually less than or equal to 2 years.

Long-Run

A period of time when input prices are completely flexible and can adjust to the aggregate price level. Usually greater than 2 years.

Short-Run Aggregate Supply (SRAS)

Supply curve that slopes upward due to sticky resource prices.

Long-Run Aggregate Supply (LRAS)

Supply curve that is perfectly inelastic at the level of full output; shows that the aggregate price level does not affect aggregate output in the long-run.

Potential Output

The normal level of output for the economy given the available factors of production. Shows the level of real GDP that the economy would produce if all input prices were completely flexible.

Short-Run Macroeconomic Equilibrium

Aggregate demand and short-run aggregate supply intersect to the left or right of the LRAS. The aggregate price level is above or below the expected price level, and output is above or below potential output (known as an Output Gap).

Long-Run Macroeconomic Equilibrium

Aggregate demand, short-run aggregate supply, and long-run aggregate supply intersect at one point on the graph. The aggregate price level matches the expected price level, and the actual output matches potential output. The economy is at full employment, and prices are stable.

Inflationary Gap

Output gap created when aggregate demand increases; prices rise above the expected price level (unexpected inflation), and unemployment falls below the natural rate. Happens when AD shifts rightward.

Recessionary Gap

Output gap that is created when aggregate demand decreases; prices fall below the expected price level (unexpected deflation or disinflation), and unemployment rises above the natural rate. Happens when AD shifts leftward.

Stagflation

A simultaneous increase in the rates of unemployment and inflation. This happens when the SRAS shifts leftward.

Self-Correcting

"Markets move toward equilibrium." If an output gap exists in the short run, the economy will gradually move back toward long-run equilibrium. If the output gap is negative, nominal wages will fall, SRAS will increase, and the economy will move back toward long-run equilibrium. If the output gap is positive, nominal wages will rise, and SRAS will decrease until the economy reaches long-run equilibrium.

Money

Item that can facilitate market transactions by serving as a medium of exchange, a unit of account, and a store of value.

Fiat Money

Money that has value because the government has decreed that it is an acceptable form of payment.

Commodity Money

Money that has intrinsic value; it has other uses besides serving as a medium of exchange, store of value, and unit of account.

Demand Deposits

A bank account that allows you to instantly access all your money. Considered as virtually equivalent to cash.

Liquidity

The ease with which an asset can be spent or turned into spendable cash at a fair market price. Cash and demand deposits are the most liquid assets.

Treasury Securities (Bonds)

A formal debt obligation issued by the US Treasury. Essentially, it’s an I.O.U. from the US government. The government borrows money for a set period of time (anywhere from 6 months to 30 years) and makes annual interest payments to the bond holder until the period of time has ended (maturity date), at which point the government repays the face value of the bond.

The Federal Reserve (The Fed)

The central bank of the United States. Established by congress in 1913, they are responsible for promoting full employment and price stability by changing the supply of money in circulation.

Federal Open Market Committee (FOMC)

The group of 7 governors general and 5 district bank presidents that vote on the monetary policy actions of the Federal Reserve.

Open Market Operations (OMO)

When the Federal Reserve Open Market Committee buys and sells US treasury securities (bonds) in order to influence the amount of money in circulation.

Interest Rate

The cost of borrowing money (also, the benefit gained from lending (or saving) money), expressed as a percentage of the principal.

Principal

The initial amount of money that is lent or borrowed.

Federal Funds Rate (FFR)

The interest rate that commercial banks charge each other for short-term loans. Always 0.5% less than the Discount Rate.

Discount Rate

The interest rate that the Federal Reserve charges commercial banks for short-term loans. Always 0.5% higher than the Federal Funds Rate.

The Reserve Requirement Ratio (RRR)

The fraction of demand deposits that banks are required to keep in reserve (cannot be loaned out). Established by the Federal Reserve for all US commercial banks.

Fractional Reserve Banking

Banks only keep a fraction of their deposits in reserve, the rest are loaned out to other customers.

Required Reserves

The fraction of demand deposits that banks are required to keep in reserve; established by the Fed’s reserve requirement ratio. Provide liquidity to banks and help protect against bank runs.

Excess Reserves

The fraction of demand deposits that banks are free to lend to other customers. Banks can only increase lending by an amount less than or equal to their _________.

Deposit Expansion Multiplier (Money Multiplier)

A formula that helps determine how much money the banking system can create with each dollar of reserves. =(1÷RRR)

Velocity of Money

The average number of times a dollar is used to purchase goods and services in a year. =(P*Y)÷M

Quantity Equation

Shows that the quantity of money in circulation has a direct, proportional relationship with the price level. Justification for the quantity theory of inflation and a key reason why the Federal Reserve can use Monetary policy to stabilize the economy. M*V = P*Y

Present value of Money

The current value of X amount of dollars to be received in N number of years given the prevailing interest rate r% =X÷(1+r)^N

Future Value of Money

The value of money P to be received in N number of years at r% interest.

Economic Growth

An increase in a society's ability to meet the needs and wants of citizens utilizing the scarce factors of production available.

Capital Deepening

A situation where the capital per worker is increasing in the economy.

Capital Flight

The rapid outflow of assets or money from a country.

Externality

A cost or benefit from production or consumption that accrues to someone other than the immediate buyers and sellers.

Public Goods

Goods or services characterized by nonrivalry and non-excludability, often produced by governments and paid for with tax revenues.

Private Goods

Goods or services that are individually consumed and can be profitably produced by privately owned firms.

Crowding-Out

When federal spending increases, causing interest rates to rise and business investment to decline.

Automatic Fiscal Policy

Fiscal policy actions that do not require a new act of congress to take effect.

Discretionary Fiscal Policy

Fiscal policy actions that do require a new act of congress to take effect.