Macroeconomics: Business Cycles, Unemployment, Inflation, and Policy

Vocabulary practice flashcards covering fundamental macroeconomic topics including gross domestic product (GDP), the business cycle, types of unemployment, inflation calculations via CPI, functions of money, and fiscal and monetary policy interventions.

Gross Domestic Product (GDP)

The total dollar value of a country's economy, comprising all goods and services produced within a country's borders within one year.

GDP Formula

$$C + I + G + X_n$$

Goods Not Included in GDP

Three categories excluded from GDP calculations: used goods, financial investments like stocks, and transfer payments such as Social Security income, SNAP benefits, and Medicare.

Business Cycle Full Employment Line

The benchmark line across periods of time on a business cycle graph where inflation occurs above the line and unemployment occurs below the line.

Unemployment

The percentage of the labor force without work who are actively seeking a job.

Cyclical Unemployment

Unemployment caused by a poor economy that is in recession; this type of unemployment does not happen in a healthy economy.

Structural Unemployment

Unemployment that affects people whose skills are no longer useful or compatible with the current job market.

Frictional Unemployment

Unemployment experienced by people who are recent graduates looking for work, between jobs, or waiting for the start date of a new job.

Discouraged Worker

An unemployed worker who has stopped actively looking for a job.

Underemployed

Workers who are working fewer hours than they prefer or who are doing a job beneath their skill set.

Inflation

An increase in the overall level of prices compared to the previous year.

Disinflation

A condition where inflation is still occurring, but at a rate that is less than the previous year's inflation.

Deflation

A decrease in the overall level of prices compared to the previous year.

CPI Multiplier: Step 1

Divide the later year Consumer Price Index (CPI) by the earlier year CPI.

CPI Multiplier: Step 2

Take the value obtained from Step 1 and multiply it by the earlier price.

Money

An asset or instrument that serves as a means of payment.

Means of Payment (Medium of Exchange)

The function of money that allows people to purchase goods and services.

Unit of Account (Measure of Value)

The function of money that identifies the amount of money and what you can buy with that amount.

Store of Value

The function of money that allows it to be held or saved over time and retain its value.

Value of U.S. Money

The value of United States currency is backed and provided by trust, rather than gold or GDP.

Federal Reserve (The Fed)

The central bank of the United States that uses monetary policy to keep the economy healthy.

Fed Monetary Control Tool

Interest rates, which the Federal Reserve changes to alter the supply of money in the economy.

Recessionary Gap (AD/AS Model)

A macroeconomic condition illustrated on an AD/AS graph where actual output ($Y_1$) is less than the potential output ($Y_f$) that the economy should produce.

Inflationary Gap (AD/AS Model)

A macroeconomic condition illustrated on an AD/AS graph where actual output ($Y_1$) is greater than the potential output ($Y_f$) that the economy should produce.

Monetary Policy for Inflation

Actions taken by the Federal Reserve to increase interest rates and decrease the money supply in order to reduce spending.

Fiscal Policy for Inflation

Actions taken by the government to decrease government spending and increase taxes to lower overall consumer and government expenditure.

Monetary Policy for Recession

Actions taken by the Federal Reserve to decrease interest rates and increase the money supply to make borrowing cheaper and stimulate spending.

Fiscal Policy for Recession

Actions taken by the government to increase government spending and decrease taxes to boost income and total spending.

Economic Self-Correction

The macroeconomic adjustment process wherein wages eventually rise or fall over time to return the economy to its long-run equilibrium.