Economics Key Terms and Concepts

A comprehensive set of vocabulary flashcards covering key microeconomic and macroeconomic terms, financial structures, labor market concepts, and monetary theory as detailed in the lecture transcript.

microeconomics

the study of how households and firms make decisions and how they interact in markets

macroeconomics

the study of economywide phenomena, including inflation, unemployment, and economic growth

gross domestic product (GDP)

the market value of all final goods and services produced within a country in a given period

consumption

spending by households on goods and services, with the exception of purchases of new housing

investment

spending on business capital, residential capital, and inventories

government purchases

spending on goods and services by local, state, and federal governments

net exports

spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

nominal GDP

the production of goods and services valued at current prices

real GDP

the production of goods and services valued at constant prices

GDP deflator

a measure of the price level calculated as the ratio of nominal GDP to real GDP times $100$

consumer price index (CPI)

a measure of the overall cost of the goods and services bought by a typical consumer

inflation rate

the percentage change in the price index from the preceding period

core CPI

a measure of the overall cost of consumer goods and services excluding food and energy

producer price index (PPI)

a measure of the cost of a basket of goods and services sold by domestic firms

indexation

the automatic correction by law or contract of a dollar amount for the effects of inflation

nominal interest rate

the interest rate as usually reported without a correction for the effects of inflation

real interest rate

the interest rate corrected for the effects of inflation

productivity

the quantity of goods and services produced from each unit of labor

physical capital

the stock of equipment and structures that are used to produce goods and services

human capital

the knowledge and skills that workers acquire through education, training, and experience

natural resources

the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits

technological knowledge

society's understanding of the best ways to produce goods and services

diminishing returns

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

catch-up effect

the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich

financial system

the group of institutions in the economy that help to match one person's saving with another person's investment

financial markets

financial institutions through which savers can directly provide funds to borrowers

bond

a certificate of indebtedness

stock

a claim to partial ownership in a firm

financial intermediaries

financial institutions through which savers can indirectly provide funds to borrowers

mutual fund

an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds

national saving (saving)

the total income in the economy that remains after paying for consumption and government purchases

private saving

the income that households have left after paying for taxes and consumption

public saving

the tax revenue that the government has left after paying for its spending

budget surplus

an excess of tax revenue over government spending

budget deficit

a shortfall of tax revenue from government spending

market for loanable funds

the market in which those who want to save supply funds and those who want to borrow to invest demand funds

crowding out

a decrease in investment that results from government borrowing

finance

the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk

present value

the amount of money today needed to produce a future amount of money, given prevailing interest rates

future value

the amount of money in the future that an amount of money today will yield, given prevailing interest rates

compounding

the accumulation of a sum of money where the interest earned remains in the account to earn additional interest in the future

risk aversion

a dislike of uncertainty

diversification

the reduction of risk achieved by replacing a single risk with a large number of smaller, imperfectly correlated risks

firm-specific risk

risk that affects only a single company

market risk

risk that affects all companies in the stock market

fundamental analysis

the study of a company's accounting statements and future prospects to determine its value

efficient markets hypothesis

the theory that asset prices reflect all publicly available information about the value of an asset

informational efficiency

the description of asset prices that rationally reflect all available information

random walk

the path of a variable whose changes are impossible to predict

labor force

the total number of workers, including both the employed and unemployed

unemployment rate

the percentage of the labor force that is unemployed

labor-force participation rate

the percentage of the adult population that is in the labor force

natural rate of unemployment

the normal rate of unemployment around which the unemployment rate fluctuates

cyclical unemployment

the deviation of unemployment from its natural rate

discouraged workers

individuals who would like to work but have given up looking for a job

frictional unemployment

unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills

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

job search

the process by which workers find appropriate jobs given their tastes and skills

unemployment insurance

a government program that partially protects the incomes of workers who become unemployed

union

a worker association that bargains with employers over wages, benefits, and working conditions

collective bargaining

the process by which unions and firms agree on the terms of employment

strike

the organized withdrawal of labor from a firm by a union

efficiency wages

above-equilibrium wages paid by firms to increase worker productivity

money

the set of assets in an economy that people regularly use to buy goods and services

medium of exchange

an item that buyers give to sellers when they want to purchase goods and services

unit of account

the yardstick people use to post prices and record debts

store of value

an item that people can use to transfer purchasing power from the present to the future

liquidity

the ease with which an asset can be converted into the economy's medium of exchange

commodity money

money that takes the form of a commodity with intrinsic value

fiat money

money without intrinsic value that is used as money by government decree

currency

the paper bills and coins in the hands of the public

demand deposits

balances in bank accounts that depositors can access on demand by writing a check

Federal Reserve (Fed)

the central bank of the United States

central bank

an institution designed to oversee the banking system and regulate the quantity of money in the economy

money supply

the quantity of money available in the economy

monetary policy

the setting of the money supply by policymakers in the central bank

reserves

deposits that banks have received but have not loaned out

fractional-reserve banking

a banking system in which banks hold only a fraction of deposits as reserves

reserve ratio

the fraction of deposits that banks hold as reserves

money multiplier

the amount of money that results from each dollar of reserves

bank capital

the resources a bank's owners have put into the institution

leverage

the use of borrowed money to supplement existing funds for investment purposes

leverage ratio

the ratio of assets to bank capital

capital requirement

a government regulation specifying a minimum amount of bank capital

open-market operations

the purchase and sale of U.S. government bonds by the Fed

discount rate

the interest rate on the loans that the Fed makes to banks

reserve requirements

regulations on the minimum amount of reserves that banks must hold against deposits

interest on reserves

the interest paid by the Fed on the reserves that banks hold

federal funds rate

the interest rate at which banks make overnight loans to one another

quantity theory of money

a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate

nominal variables

variables measured in monetary units

real variables

variables measured in physical units

classical dichotomy

the theoretical separation of nominal variables and real variables

monetary neutrality

the proposition that changes in the money supply do not affect real variables

velocity of money

the rate at which money changes hands

quantity equation

the equation $M \times V = P \times Y$, which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services

inflation tax

the revenue the government raises by creating money

Fisher effect

the one-for-one adjustment of the nominal interest rate to the inflation rate

shoeleather costs

the resources wasted when inflation encourages people to reduce their money holdings

menu costs

the costs of changing prices