Macroeconomics Practice Flashcards

A set of 64 vocabulary flashcards covering key macroeconomic concepts, theories, and policies based on the lecture exams.

Real exchange rate

The price of one country’s output in terms of the other country’s output.

Trade deficit

A condition where the value of a country’s imports exceeds the value of its exports.

Law of demand

The economic principle stating that a decrease in price leads to an increase in the quantity demanded, ceteris paribus.

Equilibrium price

The price at which the quantity demanded is equal to the quantity supplied in a market.

Macroeconomic goals for the US

Full (maximum) employment, price level stability, and economic growth.

Full employment (Goal)

Operating at the lowest level of unemployment compatible with price level stability.

Structural unemployment

Unemployment that occurs when workers do not have the skills needed for available jobs, such as an accountant replaced by a computer program.

Cyclical unemployment

Unemployment that increases during a recession when there is a lack of aggregate demand.

Purchasing power

The value of a given money (nominal) income, which decreases during periods of inflation.

Money illusion

Making financial decisions based on nominal values rather than real values.

Gross National Product (GNP)

The total market value of all final goods and services produced by labor and property owned by a country's residents in a given year, regardless of location.

Economic growth measure

The percentage change in real GDP from one period to the next.

Base year index

A cost-of-living index value that is always equal to $100$.

Personal consumption expenditures

The largest component of U.S. Gross Domestic Product (GDP).

Gross Domestic Product (GDP)

The total market value of all final goods and services produced by resources located within a country's borders, regardless of who owns those resources.

Aggregate demand (AD) curve

A downward-sloping curve indicating that an increase in the price level leads to a decrease in the quantity demanded of real GDP.

Short-run aggregate supply (SRAS) curve

An upward-sloping curve modeling the direct relationship between the price level and the quantity supplied of real GDP.

Consumer confidence (Increase)

A factor that increases aggregate demand, resulting in a higher price level, higher real output, and a lower unemployment rate.

Aggregate demand response to currency

Aggregate demand increases in response to the depreciation of the domestic currency relative to foreign currencies.

Input price decrease

A factor that causes SRAS to increase, resulting in a lower equilibrium price level and a higher equilibrium real GDP.

Adverse supply shock

A situation that leads to a decrease in output, an increase in unemployment, and an increase in the price level.

Wage increase effect

An increase in wages leads to a higher cost of production, causeing short-run aggregate supply (SRAS) to decrease.

Classical model assumption

Assumes that the economy is self-regulating and that Say’s Law is true.

Say’s Law

The economic principle summarized as "Supply creates its own demand."

Inflationary gap self-regulation

Labor market shortages lead to higher wages and costs, shifting SRAS leftward to close the gap.

Recessionary gap self-regulation

Labor market surpluses put downward pressure on wages and costs, shifting SRAS rightward to close the gap.

Laissez-faire policy

A policy associated with the Classical view that a market economy is self-correcting and government should not intervene.

John Maynard Keynes' theory

Argues for active government involvement through fiscal policy to stimulate economic activity during a recession.

Keynesian model (Spending)

Model where both consumption spending and personal saving decrease in response to a decrease in disposable income.

Horizontal SRAS effect

An increase in AD leads to an increase in output and a decrease in unemployment, but no change in the price level.

Keynesian view on self-correction

Rejects the idea that market economies automatically self-correct to full employment.

MPC (Marginal Propensity to Consume)

The ratio of a change in consumption to a change in disposable income, represented as a decimal like $0.90$.

Autonomous spending multiplier

A factor where a small change in spending leads to a multiple change in equilibrium income; calculated as $\frac{1}{1 - MPC}$.

Fiscal policy

Changes to the federal budget (spending and taxes) conducted by Congress and the administration to influence the macroeconomy.

Expansionary fiscal policy

Increases in government spending or decreases in taxes approved by Congress to stimulate aggregate demand during a recession.

Budget deficit

A condition occurring when government spending exceeds tax revenue in a given fiscal year, increasing the national debt.

Automatic stabilizers

Nondiscretionary fiscal policies, like unemployment compensation, that change automatically when the economy contracts.

Contractionary fiscal policy

Changes to the federal budget designed to help close an inflationary gap.

Laffer Curve

A curve illustrating that beyond a certain high tax rate, further increases in the rate may lead to a decrease in tax revenue.

Supply-side fiscal policy

Decreases in marginal tax rates designed to increase incentives to work, produce, and invest.

Stagflation

A period characterized by high unemployment and high inflation occurring simultaneously for a prolonged period.

Lender of last resort

A major role of the Federal Reserve to provide liquidity to banks during financial crises.

Federal Reserve District 11

The district whose main bank is located in Dallas, TX.

Tight money policy

Another term for contractionary monetary policy.

Double coincidence of wants

A requirement for barter transactions that money eliminates, making transactions more efficient.

Unit of account

A function of money used when comparing prices or values of different goods.

Store of wealth

A function of money that allows it to hold value over time for future use, such as a retirement account.

Medium of exchange

A function of money where it is accepted as payment for labor or goods.

Liquidity

The ease with which an asset may be converted into a medium of exchange without loss of value.

Bank reserves

Cash held in bank vaults and deposits held at Federal Reserve District banks.

Fractional reserve banking system

A system where banks hold less than $100\%$ of deposits as reserves and lend out the rest.

Discount rate

The interest rate a bank pays for an overnight loan of reserves from the Federal Reserve.

Federal funds rate

The key target rate for Federal Reserve monetary policy, representing the rate banks charge each other for overnight loans.

Interest on reserve balances (IORB) rate

The specific rate the Federal Reserve uses to implement monetary policy by paying interest on funds held by financial institutions.

Federal Reserve Board of Governors

A group of seven members appointed by the President to $14$-year nonrenewable terms.

Federal Open Market Committee (FOMC)

The voting group that includes the Board of Governors and five rotating regional bank presidents to set the federal funds rate target.

Dual mandate

The Federal Reserve’s responsibility to promote maximum employment and stable prices.

Monetary policy tools

Tools such as open market operations, the discount window, and reserve requirements.

Contractionary monetary policy transmission

Higher FFR and IORB rates lead to higher interest rates, discouraging borrowing and spending to reduce inflationary pressure.

Expansionary monetary policy transmission

Lower FFR and IORB rates lead to lower interest rates, encouraging borrowing and spending to increase production and employment.

Inflation acceleration response

The Fed will likely increase the federal funds rate target range to combat rising inflation.

Unemployment increase response

The Fed will likely pursue expansionary monetary policy, and interest rates are expected to fall.

Ceteris paribus

A Latin phrase meaning "all other things remaining constant."

Recessionary gap

A situation where the current equilibrium level of output is below the full-employment level.