Principles of Macroeconomics Final Exam Review

A comprehensive set of vocabulary flashcards covering the core principles of macroeconomics, including GDP, unemployment, inflation, policy tools, and economic models.

Macroeconomics

The study of economy-wide phenomena, including GDP, unemployment rates, inflation, fiscal policy, monetary policy, and international trade.

Microeconomics

The study of individual agents in the economy, specifically households and firms.

Gross Domestic Product (GDP)

The total monetary value of all finished goods and services produced within a country's borders over a specific period, usually a year.

Consumption (C)

Spending by households on goods and services, a primary component of GDP.

Investment (I)

Business investments in equipment, structures, and inventories.

Government Spending (G)

Expenditures by the government on public services and infrastructure.

Net Exports (NX)

The value of total exports minus total imports.

Expenditure Approach Formula

$$\text{GDP} = C + I + G + (X - M)$$

Closed Economy Savings-Investment Identity

The principle that in a closed economy, total savings equal total investment ($S = I$) because all savings are channeled into investment.

Aggregate Demand (AD)

The total quantity of goods and services demanded at different price levels.

Aggregate Supply (AS)

The total output firms are willing to produce at different price levels.

Classical Model

An economic model assuming flexible prices and wages where markets always clear, emphasizing supply-side factors.

Say's Law

The principle that supply creates its own demand.

Long-run neutrality of money

The idea that changes in the money supply only affect price levels in the long run, not real output.

Keynesian Model

An economic model emphasizing the role of aggregate demand in influencing output and employment, especially in the short run.

Sticky Prices and Wages

The Keynesian concept that prices and wages are slow to adjust in the short term.

Fiscal Policy

Actions where the government adjusts spending and taxation to influence economic activity.

Monetary Policy

The management of the money supply and interest rates by a central bank.

Frictional Unemployment

Short-term unemployment occurring when people are transitioning between jobs or entering the labor force.

Structural Unemployment

Long-term unemployment resulting from shifts in the economy that create mismatches between workers' skills and job requirements.

Cyclical Unemployment

Unemployment caused by economic downturns or recessions.

Natural Rate of Unemployment

The sum of frictional and structural unemployment that exists even in a healthy economy.

Consumer Price Index (CPI)

A common index used to measure inflation by tracking the prices of a basket of goods and services over time.

Phillips Curve

Illustrates the inverse relationship between inflation and unemployment in the short run.

Stagflation

A period of recession accompanied by inflationary pressures, often resulting from supply or cost shocks.

Nominal GDP

The market value of goods and services produced using current prices, without adjustment for inflation.

Real GDP

The value of goods and services produced adjusted for changes in price level (inflation or deflation).

Real GDP Calculation

$\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{Price Index}}$, where the price index is expressed as a decimal.

Demand-Pull Inflation

Inflation caused by increased demand exceeding supply.

Cost-Push Inflation

Inflation resulting from rising costs of production, such as wages or raw materials.

Balance of Payments

A record of all economic transactions between residents of a country and the rest of the world.

Current Account Deficit

An indicator that a country is importing more goods, services, and income than it is exporting.

Depreciation

A decrease in the value of a country's currency that makes exports cheaper for foreign buyers.

Closed Economy Multiplier

$$\frac{1}{MPS}$$

Tax Multiplier

$$-\frac{MPC}{MPS}$$

Balanced Budget Multiplier

A multiplier equal to $1$.

Money Multiplier

$$\frac{1}{RRR}$$

Open Economy Spending Multiplier

$$\frac{1}{MPS + MPI}$$

Okun’s Law

The relationship describing employment and output over the business cycle.

Embodied Technical Change

An increase in the quality of capital that serves as a determinant of long-run growth.