Intermediate Macroeconomics Flashcards

Comprehensive set of 100 vocabulary flashcards reviewing intermediate macroeconomics lecture materials, including national income accounting, productivity, labor markets, consumption, saving, investment, and policy theories.

Macroeconomics

The study of the structure and performance of national economies and of the government policies that affect overall economic performance.

Long-Run Macroeconomic Analysis

growth, productivity, standards of living, and capital formation—under the assumption that the economy is in equilibrium with quantity supplied equal to quantity demanded.

Short-Run Macroeconomic Analysis

The study of short-term fluctuations and overall economic activity where the economy is not required to be in equilibrium.

Business Cycle

Short-run contractions and expansions in overall economic activity across an economy.

Recession

The downward phase of a business cycle characterized by a contraction or slowdown in overall economic activity.

Recovery

The upward phase of a business cycle characterized by an expansion, boom, or increased prosperity in economic activity.

Unemployment

The economic state of individuals who are available for work and actively seeking employment but cannot find jobs.

Unemployment Rate

The proportion of the total labor force that is unemployed, calculated as $\text{Unemployment Rate} = \frac{\text{Unemployed}}{\text{Labor Force}}$.

Price Level

An aggregate measure of the prices of goods and services in an economy, such as the Consumer Price Index (CPI).

Inflation Rate

The percentage rate of increase in the price level per period, calculated as $\frac{P_{t+1} - P_t}{P_t}$.

Deflation

A period during which the aggregate price level of an economy declines.

Hyperinflation

An extremely high and rapidly accelerating rate of inflation in an economy.

Open Economy

An economy that engages in extensive trading and financial relationships with other national economies.

Closed Economy

An economy that does not conduct trade or financial interactions with the rest of the world.

Trade Surplus

A situation in an open economy where exports exceed imports.

Trade Deficit

A situation in an open economy where imports exceed exports.

Fiscal Policy

Macroeconomic policy conducted by the federal government concerning government spending and taxation.

Monetary Policy

Macroeconomic policy conducted by a central bank concerning money supply growth and interest rate levels.

Aggregation

The process of summing individual microeconomic variables to obtain economy-wide macroeconomic totals.

Positive Analysis

Economic analysis that examines the actual, objective consequences of an economic policy without value judgments.

Normative Analysis

Economic analysis that evaluates whether a particular economic policy should be implemented based on value judgments.

The Invisible Hand

The classical economic concept that free markets and self-interested individuals coordinate economic activity efficiently without central direction.

National Income Accounts

An accounting framework, such as NIPA in the United States, used to measure comprehensive current economic activity across production, income, and expenditure.

Fundamental Identity of National Income Accounting

The core accounting rule stating that $\text{Total Production} = \text{Total Income} = \text{Total Expenditure}$.

Product Approach to Measuring GDP

A method of measuring economic output by summing the value added of all producers, defined as output value minus intermediate input costs.

Income Approach to Measuring GDP

A method of measuring economic activity by summing all net incomes received by producers, including employee compensation, profits, interest, and taxes.

Expenditure Approach to Measuring GDP

A method of measuring economic activity by summing all spending by final purchasers of output.

Gross Domestic Product (GDP)

The market value of final goods and services newly produced within a nation during a specified period of time.

Value Added

The market value of a firm's output minus the market value of intermediate inputs purchased from other producers.

Intermediate Goods and Services

Goods and services used up entirely in the production of other goods and services during the same time period.

Final Goods and Services

Goods and services produced that are not completely used up in production during the period, including capital goods and inventory investment.

Gross National Product (GNP)

The market value of final goods and services produced by domestically owned factors of production, regardless of location.

Net Factor Payments from Abroad (NFP)

Income paid to domestic factors of production located abroad minus income paid to foreign factors of production located domestically, where $\text{GDP} = \text{GNP} - \text{NFP}$.

Personal Consumption Expenditures (C)

Spending by domestic households on final goods and services, divided into consumer durables, nondurable goods, and services.

Gross Private Domestic Investment (I)

Spending by private entities on new capital goods (fixed structures, equipment, and software), residential construction, and inventory investment.

Government Purchases of Goods and Services (G)

Spending by federal, state, and local governments on recently produced final goods and services, excluding transfers and debt interest.

Net Exports (NX)

Exports minus imports, representing foreign spending on domestically produced final goods and services minus domestic spending on foreign goods.

Private Disposable Income

The income available to the private sector after government intervention, calculated as $Y + \text{NFP} + \text{TR} + \text{INT} - T$.

Government Net Income

The total revenue collected by the government minus outlay transfers and debt interest payments, calculated as $T - \text{TR} - \text{INT}$.

Private Saving ($S_{pvt}$)

Private disposable income minus consumption, defined as $S_{pvt} = (Y + \text{NFP} - T + \text{TR} + \text{INT}) - C$.

Government Saving ($S_{govt}$)

Government receipts minus outlays, equal to the budget surplus and calculated as $S_{govt} = (T - \text{TR} - \text{INT}) - G$.

National Saving ($S$)

The combined saving of the private and government sectors, calculated as $S = S_{pvt} + S_{govt} = Y + \text{NFP} - C - G = \text{GNP} - C - G$.

Current Account Balance (CA)

Net payments received from abroad in exchange for current goods, services, and factor payments, satisfying $\text{CA} = \text{NX} + \text{NFP}$.

Uses-of-Saving Identity

The identity showing that private saving is allocated among domestic investment, the government deficit, and net foreign lending: $S_{pvt} = I + (-S_{govt}) + \text{CA}$.

Nominal GDP

The value of an economy's final output measured at current market prices.

Real GDP

An estimate of the value of an economy's final output that adjusts for price changes by using base-year market prices.

GDP Deflator

A price index measuring the average price level of goods and services included in GDP, calculated as $\text{GDP Deflator} = 100 \times \frac{\text{Nominal GDP}}{\text{Real GDP}}$.

Consumer Price Index (CPI)

A price index measuring the overall cost of a fixed basket of consumer goods and services relative to a base period.

Substitution Bias

The upward bias in the CPI caused by maintaining a fixed basket of goods that ignores consumer shifts toward goods whose relative prices have fallen.

Quality Adjustment Bias

The upward bias in the CPI caused by difficulty in fully accounting for improvements in product quality over time.

Personal Consumption Expenditure (PCE) Price Index

A chain-weighted price index based on actual household expenditures that avoids substitution bias.

Core PCE Inflation Rate

The PCE inflation rate calculated excluding volatile food and energy price changes.

Nominal Interest Rate ($i$)

The rate at which the nominal monetary value of an asset or financial contract grows over time.

Real Interest Rate ($r$)

The rate at which the real purchasing power of an asset grows over time, approximated by $r = i - \text{π}$.

Expected Real Interest Rate ($r^e$)

The nominal interest rate minus the expected rate of inflation, defined as $r^e = i - \text{π}^e$.

Expected After-Tax Real Interest Rate ($r_{a-t}$)

The expected real return on saving after taking into account taxes on interest income, given by $r_{a-t} = (1 - t)i - \text{π}^e$.

Total Factor Productivity (TFP, $A$)

A parameter measuring overall efficiency and technology in a production function, reflecting how effectively capital and labor inputs are used.

Cobb-Douglas Production Function

A specific production function form that fits U.S. aggregate output data well, represented as $Y = A K^{0.3} N^{0.7}$.

Diminishing Marginal Product

The property that as the amount of one input rises while keeping other inputs constant, the additional output produced per unit of that input declines.

Marginal Product of Capital (MPK)

The increase in output resulting from a 1-unit increase in capital stock, equal to $\text{MPK} = \frac{\text{Δ}Y}{\text{Δ}K}$.

Marginal Product of Labor (MPN)

The increase in output resulting from a 1-unit increase in labor input, equal to $\text{MPN} = \frac{\text{Δ}Y}{\text{Δ}N}$.

Supply Shock

A change in an economy's production function or TFP ($A$) that changes the output produced for given input amounts.

Marginal Revenue Product of Labor (MRPN)

The additional revenue generated by hiring one additional worker, equal to price times the marginal product of labor: $\text{MRPN} = \text{MPN} \times P$.

Profit-Maximizing Labor Demand Condition

The condition where a competitive firm hires labor until nominal wage equals marginal revenue product ($W = \text{MRPN}$), or real wage equals marginal product of labor ($w = \text{MPN}$).

Aggregate Labor Demand

The sum of all individual firms' labor demands in an economy, represented as a downward-sloping curve relative to the real wage.

Income-Leisure Trade-off

The decision facing individual workers balancing the consumption benefit of working against the opportunity cost of lost leisure time.

Substitution Effect of a Real Wage Increase

The incentive to work more when the real wage rises because the reward for working and the opportunity cost of leisure increase.

Income Effect of a Real Wage Increase

The incentive to work less when the real wage rises because higher wages raise real wealth, allowing workers to afford more leisure.

Intensive Margin of Labor Supply

Adjustments in labor supply resulting from changes in work hours per individual worker.

Extensive Margin of Labor Supply

Adjustments in labor supply resulting from changes in total working-age population or participation rates.

Classical Model of the Labor Market

The supply-demand framework assuming real wages adjust rapidly to clear the labor market at full employment.

Full-Employment Level of Employment ($\bar{N}$)

The level of employment achieved when the labor market clears and labor supply equals labor demand.

Full-Employment Output ($\bar{Y}$)

The potential output produced when the labor market is in equilibrium at full employment, expressed as ̄{Y} = A F(K, ̄{N}).

Labor Force

The total number of adult civilian workers who are either employed or unemployed: $\text{Labor Force} = \text{Employed} + \text{Unemployed}$.

Labor Force Participation Rate

The percentage of the civilian adult population that is in the labor force, calculated as $\frac{\text{Labor Force}}{\text{Adult Population}}$.

Employment Ratio

The percentage of the civilian adult population that is employed, calculated as $\frac{\text{Employed}}{\text{Adult Population}}$.

Discouraged Workers

Individuals who desire jobs but stop actively searching due to lack of success, thereby leaving the official labor force.

Unemployment Spell

The period of continuous time during which an individual worker remains unemployed.

Frictional Unemployment

Unemployment associated with the time required for job seekers and employers to search and match in a changing economy.

Structural Unemployment

Long-term, chronic unemployment arising from structural shifts, lack of requisite skills, or geographic mismatches.

Natural Rate of Unemployment ($\bar{u}$)

The unemployment rate prevailing when output and employment are at full-employment levels and the labor market clears.

Cyclical Unemployment

The difference between the actual unemployment rate and the natural rate of unemployment (u - ̄{u}).

Okun's Law (Output-Gap Form)

The empirical relationship stating that a 1 percentage point increase in cyclical unemployment reduces full-employment output by 2%: \frac{̄{Y} - Y}{̄{Y}} = 2(u - ̄{u}).

Okun's Law (Growth-Rate Form)

The empirical rule relating real GDP growth to changes in unemployment: $\frac{\text{Δ}Y}{Y} = 3 - 2\text{Δ}u$, where 3% represents potential output growth.

Desired Consumption ($C^d$)

The aggregate level of consumption spending that households desire to undertake given current and expected economic conditions.

Desired National Saving ($S^d$)

The level of national saving when consumption is at its desired level, defined in a closed economy as $S^d = Y - C^d - G$.

Consumption-Smoothing Motive

The preference of households to maintain a relatively stable consumption pattern over time rather than enduring large consumption swings.

Marginal Propensity to Consume (MPC)

The fraction of additional current income that households choose to consume in the current period, satisfying $0 < \text{MPC} < 1$.

Ricardian Equivalence Proposition

The proposition that lump-sum tax cuts have no effect on desired consumption or national saving if taxpayers realize future taxes will rise by an offsetting amount.

User Cost of Capital ($uc$)

The expected real cost of using a unit of capital per period, equal to real interest cost plus depreciation cost: $uc = (r + d)p_K$.

Desired Capital Stock ($K^d$)

The capital stock that maximizes expected firm profit, determined where expected future marginal product equals user cost ($\text{MPK}^f = uc$).

Tax-Adjusted User Cost of Capital

The user cost of capital adjusted for taxes on revenue, given by $\frac{uc}{1 - \tau}$, where firm profit maximization requires $\text{MPK}^f = \frac{uc}{1 - \tau}$.

Effective Tax Rate on Capital ($\tau$)

A single calculated tax rate on revenues that accurately reflects the total effect of complex actual tax codes on desired capital stock.

Net Investment

Gross investment minus capital depreciation, representing the change in total capital stock: $K_{t+1} - K_t = I_t - d K_t$.

Tobin's q

The ratio of a firm's stock market valuation to the replacement cost of its physical capital, $q = \frac{V}{p_K \times K}$, where $q > 1$ encourages new investment.

Goods Market Equilibrium Condition

The condition where aggregate supply equals desired aggregate demand ($Y = C^d + I^d + G$), or equivalently desired national saving equals desired investment ($S^d = I^d$).

Crowding Out

The reduction in private investment caused by increased government purchases that reduce national saving and raise real interest rates.

Average Labor Productivity

Real output divided by civilian employment, representing average production per worker.

Production Function Relating Output and Capital

Graph showing output as a function of capital stock given constant labor and TFP, illustrating diminishing marginal productivity of capital.

Labor Demand Curve Determination

Diagram showing that a firm's labor demand curve is identical to its MPN curve, equating real wage $w^*$ with marginal product at equilibrium employment $N^*$.