Economics Review: Macroeconomic Indicators, Fiscal & Monetary Policy, and Microeconomic Foundations

Vocabulary flashcards covering core concepts from macroeconomics and microeconomics, including national income accounting, aggregate demand and supply, fiscal and monetary policies, market structures, and fundamental production principles.

Macroeconomics

The study of the behavior of the economy as a whole, including aggregate output, unemployment, and inflation.

Three Main Goals of Macroeconomic Policy

Achieving full employment, price stability, and economic growth.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a country's borders during a specific time period.

Real GDP

The measure of output calculated by adjusting nominal GDP for changes in price levels using a price index such as the GDP deflator.

Expenditure Approach to Calculating GDP

The calculation method that sums consumption, investment, government purchases, and net exports ($C + I + G + NX$).

Income Approach to GDP

A method to calculate GDP that includes wages, rent, interest, and profits, which theoretically equals GDP calculated by the expenditure approach.

GDP Per Capita

An economic indicator calculated by dividing total GDP by the population, providing a measure of average living standards.

GDP Deflator

A price index that measures the change in prices of a fixed basket of consumer goods and services purchased by typical households.

Net Exports

A trade indicator that is positive when a country exports more goods and services than it imports.

Aggregate Demand (AD) Curve

A graphical representation showing the relationship between the overall price level and the total quantity of goods and services demanded in the economy.

Causes of Downward-Sloping Aggregate Demand

The three economic mechanisms causing the aggregate demand curve to slope downward: the wealth effect, interest rate effect, and exchange rate effect.

Expansionary Fiscal Policy

A policy that involves increasing government spending and/or decreasing taxes to stimulate aggregate demand, used when the economy falls into a recession and unemployment increases.

Contractionary Fiscal Policy

A policy used when the economy grows too fast in an economic boom with high inflation to shift aggregate demand and reduce inflation.

Three Main Functions of Money

The essential roles served by money: medium of exchange, unit of account, and store of value.

Central Bank

An institution (such as the Federal Reserve in the US) that conducts monetary policy to influence interest rates and the money supply.

Reserve Requirement

The percentage of deposits that commercial banks must hold as reserves and cannot lend out.

Contractionary Monetary Policy

A monetary strategy typically used to combat high inflation by reducing the money supply and raising interest rates.

Binding Price Floor

A minimum allowable price that creates a surplus in the market because the quantity supplied exceeds the quantity demanded at that price.

Natural Monopoly

A monopoly that occurs when economies of scale are so large that one firm can supply the entire market at lower cost than multiple firms, typically when average cost is declining over the relevant range of output.

Profit-Maximizing Rule for Perfect Competition

The production decision where a competitive firm maximizes profit by producing where price equals marginal cost ($P = MC$).

Short-Run Supply Curve of a Perfectly Competitive Firm

The firm's marginal cost curve lying above the minimum point of its average variable cost curve.

Economies of Scale

A production characteristic that occurs when long-run average cost decreases as output increases.

Law of Diminishing Marginal Returns

The economic principle stating that as more of a variable input is added to fixed inputs, the marginal product eventually decreases.

Positive Economics

An approach to economics that describes "what is" and can be tested with empirical data.

Normative Economics

An approach to economics that describes "what should be" and inherently involves value judgments.

Scarcity

The fundamental economic problem that exists because human wants are unlimited while resources are limited.

Production Possibility Frontier (PPF)

A curve showing all combinations of two goods that can be produced with available resources and technology when resources are fully and efficiently employed.

Slope of the PPF

The graphical measure representing the opportunity cost of producing one additional unit of a good in terms of the other good.

Substitution Effect

The component of a price increase that always causes the quantity demanded of that good to decrease.