ECON 252: Macroeconomics - Key Concepts and Vocabulary

Comprehensive vocabulary flashcards generated from Purdue University ECON 252 macroeconomics practice questions taught by Prof. Todd Yarbrough.

Opportunity Cost of Present Consumption

The future consumption given up by consuming a dollar today, equal to the $(1 + r)$ dollars of future consumption that saving would have yielded at real interest rate $r$.

Real Interest Rate Shift in Intertemporal Choice

An increase in the real interest rate $r$ that shifts consumption toward the future for all households via the substitution effect, expanding lifetime consumption possibilities for net savers while contracting them for net borrowers.

Indeterminate Price Change Rule

The market rule stating that when two curves shift in ways that push price in opposite directions (e.g., simultaneous leftward shifts in demand and supply), quantity unambiguously falls while the net price change cannot be determined without knowing which shift is larger.

Inflation Expectations Effect

The phenomenon where expected higher future prices lead buyers to shift purchases forward (increasing current demand) and sellers to hold back inventory (reducing current supply), causing current prices to rise.

Deadweight Loss

The standard economic measure of inefficiency created by policy distortions like price ceilings, defined as the total value of mutually beneficial trades that are prevented from taking place.

Perfect Competition

A market structure defined by many small buyers and sellers unable to influence price, identical products, free entry and exit, full information, and no externalities.

Systemic Risk

The risk that financial distress or failure at interconnected institutions spreads or cascades through the financial system as a whole.

Macroprudential Regulation

Regulatory supervision targeting the stability of the entire financial system—using tools like stress tests and countercyclical capital buffers—rather than supervising individual institutions.

Flow Variable

An economic variable measuring value or quantity over a defined period of time (such as Gross Domestic Product measured per quarter or per year), which adds to a stock variable over time.

Tax Change Effect on Consumption

A change in taxes $T$ that alters consumption $C(Y - T)$ by less than the full tax amount because households absorb part of the change in disposable income by altering saving.

Total Factor Productivity ($A$)

The variable $A$ in aggregate production function $Y = A \times F(K, L)$ measuring the efficiency with which an economy converts capital $K$ and labor $L$ into output $Y$.

Diminishing Marginal Returns to Capital

The economic principle that holding labor fixed and adding successive units of capital causes output growth to slow because each additional unit of capital has fewer workers to operate it.

Rule of 70

An approximation formula stating that the doubling time of a growing variable in years is roughly $70$ divided by the annual growth rate expressed as a percentage.

Investment per Worker (Solow Model)

The product of savings rate $s$ and output per worker $A \times f(k)$, expressed as $s \times A \times f(k)$, which inherits the curved shape of the per-worker production function.

Steady-State Capital Shift

In the Solow model, an increase in Total Factor Productivity ($A$) that shifts the investment curve $s \times A \times f(k)$ upward, increasing the steady-state stock of capital per worker $k^*$ and output per worker.

Creative Destruction

Joseph Schumpeter's concept describing how technological innovation drives economic growth by raising productivity while simultaneously rendering existing firms, skills, and jobs obsolete.

Sustained Long-Run Growth

In the Solow growth model, output per worker growth that can be sustained continuously in the long run only through ongoing growth in Total Factor Productivity ($A$).

Unemployment Rate

The percentage of the total labor force that is actively seeking work but unemployed, calculated as $\frac{\text{Unemployed}}{\text{Employed} + \text{Unemployed}} \times 100$.

Structural Unemployment

Long-lasting joblessness caused by a fundamental mismatch between the skills or locations of workers and the available jobs in the economy.

Frictional Unemployment

Short-term joblessness experienced by individuals moving between jobs or searching for new employment in a normal, dynamic labor market.

Natural Rate of Unemployment

The baseline unemployment rate present when an economy is operating at full employment, consisting of frictional and structural unemployment while excluding cyclical unemployment.