Quiz 1 Study Guide

Vocabulary practice flashcards covering macroeconomic definitions, models, indicators, and policy tools from the lecture notes.

Aggregate Demand

The total amount of all goods and services demanded in an economy, represented by the sum of consumption, investment, government spending, and net exports (exports - imports).

Aggregate Supply

The total amount of goods and services that firms in the economy are willing to produce.

Equilibrium

A state of balance where supply and demand are equal.

Business Cycle

Tracks peaks and troughs in the economy over time.

Trough

The lowest point of economic activity in the business cycle. It marks the end of a recession and the beginning of an expansion.

Time Series

A set of observations of an economic variable measured over time, usually at regular intervals (monthly or quarterly).

CPI (Consumer Price Index)

A way to measure inflation by choosing a random basket of goods and following changes in price over time.

GDP Deflator

A measure of the overall price level of goods and services produced domestically, calculated as $\text{Nominal GDP} / \text{Real GDP} \times 100$.

PPI (Producer Price Index)

Measures the average change over time in prices received by domestic producers; changes predict future changes in consumer prices, since higher production costs are passed onto consumers.

Transfer Payment

A one-way redistribution of income from government to recipients who don’t provide goods/services in return, such as Social Security, welfare payments, and unemployment benefits.

Cobb-Douglas Production Function

Describes how an economy combines inputs to produce outputs, given by $Y = A K^{\alpha} L^{1 - \alpha}$.

Diminishing Marginal Product

Shown with a PPF curve; as you switch from one good to another, you get diminishing returns as non-suitable resources are used.

GDP per capita

GDP per person

Golden-Rule of Capital Stock

The highest permanently sustainable level of consumption, where a marginal increase in capital produces just enough extra output to cover increased investment requirements, defined as $\text{MPK} = d + n$ where $d$ is the depreciation rate and $n$ is population growth.

Social Infrastructure

Institutions, patents, and legal systems that can contribute to economic growth.

Potential Employment / Potential GDP

Potential employment is the level of employment when the economy is operating at full employment; potential GDP is the amount of output the economy can produce when resources are being used at their normal/full employment level.

Full Employment

The natural rate of unemployment

Output Gap

The difference between an economy’s actual GDP and its potential GDP.

Unemployment Rate

Percentage of the labor force that is unemployed and actively looking for work (never $0\%$)

One-shot vs. Persistent Inflation

One-shot inflation is a one-time increase in price level, whereas persistent inflation means price levels continue to rise over time.

Real GDP vs. Nominal GDP

Nominal GDP changes because of both prices and quantities, real GDP removes the effect of inflation so changes reflect only changes in output.

Government Deficit

Occurs when the government spends more than it collects in revenue, calculated as $\text{Deficit} = \text{government purchases} + \text{transfer payments} - \text{tax revenue}$.

Trade Deficit

Occurs when a country imports more goods/services than it exports,

a strong dollar leads to greater trade deficits.

Strong Dollar vs. Weak Dollar

STRONG DOLLAR: U.S. goods are more expensive for foreigners (exports decrease) and foreign goods are cheaper for Americans (imports increase).

WEAK DOLLAR: U.S. goods are cheaper for foreigners (exports increase) and foreign goods are more expensive for Americans (imports decrease).

Neoclassical Growth Model (Solow)

Explains how an economy’s capital, labor, and technology determine economic growth, treating technology as exogenous.

Endogenous Growth Model (Neoclassical)

Considers technology within the model through factors such as innovation, R&D, and human capital, unlike the Neoclassical model where growth comes from exogenous technology outside the model.

Steady State

The state where capital per worker ($k$) is constant; depreciation reduces capital stock, and investment must replace depreciated capital while accounting for population growth to maintain $k$.

Saving vs. Investment

Saving is income not spent on consumption ($S = Y - C - G$) that provides funds for investment; investment is savings spent on new capital. In a closed economy, $S = I$.

Okun’s Rule

Relates unemployment to GDP, stating that a $1\%$ decline in unemployment results in a $2\%$ decline in GDP.

Keynesianism

Emphasizes aggregate demand as a major determinant of short-run economic activity and highlights sticky wages.

Capital’s Share of the Economy

The portion of national income that goes to owners of capital as profits and interest.

Labor’s Share of the Economy

The portion of national income that goes to workers as wages and salaries.

Total Factor Productivity

Measures how efficiently an economy turns capital and labor into output, represented by $A$ in the production function $Y = A K^{\alpha} L^{1 - \alpha}$.

Exogenous Growth

technology is considered outside the model

Endogenous Growth

technology is considered inside the model

Asian Tigers

Hong Kong, Taiwan, Singapore, and South Korea, which grew remarkably after the 1960s by savings and high investment in physical capital and human capital.

Solow Residual

A measure of total factor productivity representing the part of economic growth that cannot be explained by increases in capital and labor.

Say’s Law

supply creates its own demand.

Inflationary Gap

Occurs when actual GDP is above potential GDP, meaning the economy is producing above its sustainable full-employment level, creating upward pressure on prices and inflation.

Dynamic Scoring

Estimating the cost of a congressional bill under the assumption that cutting taxes pays for itself through increased investment and economic activity, which historically does not hold true.

Natural Rate of Unemployment

The unemployment rate when the economy is at full employment with no cyclical unemployment.

Eckstein-Brinner Philips Curve

short-run trade-off between inflation and unemployment.

Keynesian Aggregate Supply Curve

Shows how much output firms will produce at different price levels when the economy has unused resources; relatively flat when the economy is below full employment.

Adjustable-Rate Mortgage

Mortgages where interest rates are variable throughout time.

Sticky Wages / Prices

Refers to wages being slow to adjust, so the aggregate supply curve does not always shift exactly to reflect prices.

Imperfectly Anticipated Inflation

Occurs when actual inflation differs from expectations, creating unexpected effects on real wages, interest rates, and income distribution.

Traditional Philips Curve

Shows a short-run inverse relationship between inflation and unemployment.

Economic Shock

An unexpected event, such as an oil shock, that significantly changes economic conditions.

Unions

Organizations that increase workers’ bargaining power and can influence wages, employment, production costs, and inflation.

Minimum Wage Laws

set min wage for workers

Full Employment

no cyclical employment

Frictional vs. Structural vs. Cyclical Unemployment

Frictional means between jobs

Structural means a mismatch between workers and available jobs

Cyclical is caused by downturns in the business cycle.

Discouraged Workers

People who want jobs but are not actively looking.

NAIRU

Non-Accelerating Inflation Rate of Unemployment; the unemployment rate at which inflation remains stable.

Velocity of Money

The speed at which money moves through the economy, defined by $\text{Money Supply} \times \text{Velocity} = \text{Price} \times \text{Real GDP}$

Shifters

things that move a graph

Core Inflation

Inflation minus food and energy prices.

National Accounting Equation

$$Y = C + I + G + NX$$

Long-Run Philips Curve

Curve tied to the NAIRU showing that there is no permanent tradeoff between inflation and unemployment.

WN Curve

The Wage-Natural Rate relationship showing the relationship between the real wage and the unemployment rate; lower unemployment gives workers more bargaining power, leading to higher real wages.

Recessions

A decline in economic activity, typically involving falling real GDP, employment, income, and spending.

Bonds

Purchasing a company's or government's debt.

Money Market

Structured like the goods market, but money is the asset being bought and sold.

Twin Deficit Hypothesis

Defines $\text{S} - \text{I} = \text{Government deficit} + \text{Trade deficit}$ (or $\text{I} - \text{S} = \text{Government deficit} - \text{Trade deficit}$), stating that the government deficit runs the trade deficit.

The Wealth of Nations

A book by Adam Smith that emphasizes specialization, productivity, competition, markets, and the benefits of trade as foundations of economic growth.

Input Markets

Markets where firms purchase the resources used to produce goods and services.

Durable Goods

Goods that provide useful services over a long period of time, such as cars, refrigerators, and computers.

Short-Term vs. Long-Term Aggregate Supply

Short-term aggregate supply is upward sloping because prices and wages are sticky in the short run; long-term aggregate supply is vertical because output is determined by productive capacity rather than price level.

Monetary Illusion

A situation where wages are not increasing as much as the public thought they would.

Federal Reserve

The central bank of the U.S. that conducts monetary policy.

Monetary Policy

The Fed’s ability to influence interest rates and aggregate demand; main tools include open market operations, federal funds rate, and reserve requirements.

Federal Funds Interest Rate

The interest rate charged on overnight loans of reserve balances between banks.

Fiscal Policy

The government’s use of spending and taxation to influence the economy.

Supply Side Economics

The idea of increasing the economy’s productive capacity and GDP through increasing production, labor supply, and improving incentives.

Lambda (The Slope of Overheatedness)

Used in the Philips curve to measure how strongly inflation responds to economic overheating, represented by the gap between unemployment and its natural rate.

Rational Expectations

Theory that people form their expectations about the future using all available information.

Expectations Augmented Philips Curve

Adds expected inflation to the traditional Philips Curve, explaining why there is no permanent tradeoff between inflation and unemployment.

Institutions

Laws and organizations (such as property rights) that structure economic activity and influence how households and firms make decisions.

Level Effect vs. Growth Effect

A level effect moves the economy to a higher or lower path at a particular point in time, while a growth effect causes the path to become steeper or flatter over time.

Elasticity

Measures the responsiveness of a variable to a change in price.

Consumer Surplus vs. Producer Surplus

Consumer surplus is a buyer's gains from trade, while producer surplus is a producer's gains from trade.

Efficiency Wage Theory

The theory that paying employees higher wages results in them working more efficiently.