ECC1100 Principles of Macroeconomics Vocabulary

Flashcards covering key vocabulary from the Principles of Macroeconomics lecture.

Gross Domestic Product (GDP)

The market value of the final goods and services produced in a country during a given period.

The Production Function

Output is a function of inputs. Y = f(L, H, K) where L=Labor, H=Human Capital, and K=Physical Capital

Labor productivity

The quantity of goods and services that each person produces per hour of work.

Constant returns to scale

A situation when all inputs are increased by some proportion and output increases by the same proportion.

The law of diminishing returns

When one input is held constant, increases in the other inputs will, at some point, begin to yield smaller and smaller increases in output.

Employed

People who are currently employed.

Unemployed

People who are not employed but are actively looking for work.

Frictional unemployment

Unemployment due to the time workers spend in job search.

Structural unemployment

Unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.

Cyclical unemployment

Unemployment caused by a recession

The consumer price index (CPI)

An index that tracks the average price consumers pay over time for a representative basket of goods and services.

Inflation rate

The change in average prices (CPI).

Money

An asset regularly used in transactions.

Marginal propensity to consume

The fraction of each extra dollar of income that households spend on consumption.

Nominal interest rate

The rate of interest before adjustment for inflation.

Real interest rate

The interest rate corrected for the effects of inflation.

Nominal exchange rate

Price of one country's currency in terms of another country's currency.

Real exchange rate

The rate at which a person can trade the goods and services of one country for the goods and services of another.

Potential output

The level of output that occurs when all resources are fully employed.

Output gap

Actual output − Potential output / Potential output × 100

Aggregate expenditure

The total amount of goods and services that people want to buy across the country.

Aggregate supply curve

The relationship between the price level and the total quantity of output that suppliers collectively produce.

Monetary Policy

The process of setting interest rates in an effort to influence economic conditions

Dual mandate

Two goals of stable prices and maximum sustainable employment.

Fiscal policy

The government’s use of spending and tax policies to attempt to stabilize the economy.

Multiplier

A measure of how much GDP changes as a result of both the direct and indirect effects flowing from each extra dollar of spending.

Marginally Attached Workers

Individuals available for work who haven't actively sought employment in the past 4 weeks.

Consumption Smoothing

A theory where consumers prefer a consistent consumption pattern over reacting to temporary income changes.

Loanable Funds Market

Illustrates how supply and demand for loanable funds determine real interest rates and investment levels.

Current Account

Tracks transactions of goods, services, income, and current transfers between a country and the rest of the world.

Financial Account

Records transactions of financial assets and liabilities between a country and the rest of the world.

Okun's Rule of Thumb

Suggests that a 1% increase in cyclical unemployment leads to approximately a 2% decrease in a country's GDP.

Monetary Policy Tools

Include interest rate adjustments, reserve requirements, and open market operations used to manage inflation and unemployment.

CPI Biases

Tend to overstate the actual inflation rate due to factors like substitution bias and quality changes.

Investment

Expenditures by businesses on new capital assets that enhance the economy's productive capacity. Influenced by technological change, interest rates, and confidence.