Macro Key term quiz

Crowding Out

The idea that expansionary fiscal policy is not very effective in increasing

aggregate demand because the increased borrowing needs of the government

to finance the increased expenditures could lead to increased interest rates.

Thus, reducing private sector investment, consumer spending, and other

components of AD.

Unemployment

When a person (who is above a specified age and is available to work) is actively

looking for work, but is without a job.

Unemployment rate

The number of unemployed workers expressed as a percentage of the total

workforce.

Cyclical Unemployment

Unemployment that is a result of a decrease in aggregate demand and thus of

economic activity; it occurs in a recession.

Frictional Unemployment

Unemployment of individuals who are in-between jobs, as people quit to find a

better job or to move to a different location.

Structural Unemployment

A kind of long-term unemployment that arises from a number of factors

including: technological change; changes in the patterns of demand for

different labour skills; changes in the geographical location of industries; labour

market rigidities.

Seasonal Unemployment

Unemployment that arises when people are out of work because their usual job

is out of season, for example, agricultural workers during winter months.

Deflation

A sustained decrease in the average price level of a country.

Inflation

A sustained increase in the average level of prices.

Disinflation

When the average price level continues to rise but at a slower rate so that the

rate of inflation is positive but lower.

Inflation Rate

The percentage change between two periods of the average price level, usually

measured through the CPI.

Inflationary gap

The case where equilibrium real output exceeds potential output as a result of

an increase in AD.

Deflationary/ Recessionary gap

Arises when the equilibrium level of real output is less than potential output as

a result of a decrease in AD.

Demand-pull inflation

Inflation that is caused by increases in aggregate demand.

Demand-side policies

Refers to economic policies that aim at affecting aggregate demand and thus

macroeconomic variables such as growth, inflation and employment; demand

side policies include fiscal policy and monetary policy.

Supply-side policies

Government policies designed to shift the long-run aggregate supply curve to

the right, thus increasing potential output in the economy and achieving

economic growth.

Deregulation

Policies that reduce or eliminate regulations related to the operation of firms so

that production costs decrease—resulting in increased competition and higher

levels of output.

Economic Growth

Refers to increases in real GDP over time.

Expenditure Approach

One of three analytically equivalent approaches of measuring GDP that adds all

the expenditures made on final domestic goods and services over a period of

time by households, firms, the government and foreigners.

Fiscal Policy

A demand-side policy using changes in government spending and/or direct

taxation to influence aggregate demand and thus growth, employment and

prices.

Full employment

A goal of macroeconomic policy that aims at fully utilizing the scarce factor of

production labour. Full employment exists when the economy is producing at

its potential level of real output and thus there is only natural unemployment

(the AD–AS model considers the AD and AS curves together). In the production

possibilities curve (PPC model), full employment exists when the economy is

producing on the PPC.

Full employment level of output

The level of output that is produced by the economy when there is only natural

unemployment.

Gross domestic product

The value of all final goods and services produced within an economy over a

period of time, usually a year or a quarter.

Gross national income

The income earned by all national factors of production independently of where

they are located over a period of time; it is equal to GDP plus factor income

earned abroad minus factor income paid abroad.

Human development Index

A composite index of development that reflects the three basic goals of

development, which are a long and healthy life, improved education, and a

decent standard of living. The variables measured are life expectancy at birth,

mean years of schooling and expected years of schooling, and GNI per capita

Direct Tax

Taxes on income, profits or wealth paid directly to the government.