Macroeconomics: Economic Activity, Objectives, and Government Policies

Vocabulary practice flashcards covering macroeconomic indicators, aggregate demand and supply models, macroeconomic objectives, and government demand/supply-side management policies.

Expenditure Approach

A method of measuring national output that adds up all spending to buy final goods and services produced within a country over a time period (usually a year).

Income Approach

A method of measuring national output that adds up all income earned by the factors of production that produce all goods and services within a country over a time period.

Output Approach

A method of measuring national output that calculates the value of all final goods and services produced in a country over a time period.

Consumption Spending ($C$)

All spending by households on final goods and services.

Investment Spending ($I$)

Spending by firms on capital goods and spending on new construction.

Government Spending ($G$)

Spending by government (national, state, and local) on goods, services, and factors of production including labour services.

Net Exports ($X_n$ or $X - M$)

The total value of export revenue minus import expenditure.

Gross Domestic Product (GDP)

The market value of all final goods and services produced in a country over a time period (usually a year), expressed as $\text{GDP} = C + I + G + (X - M)$.

Gross National Income (GNI)

The total income received by the residents of a country, equal to the value of all final goods and services produced by factors of production supplied by the country's residents regardless of location, calculated as $\text{GNI} = \text{GDP} + \text{net income from abroad}$.

Nominal Values

Economic values based on prices that prevail at the moment current measurements are taken.

Real Values

Economic values that take into account price changes over time to allow accurate output comparisons.

GDP Deflator

A price index used to convert nominal GDP into real GDP, calculated as $\text{GDP deflator} = \frac{\text{nominal GDP}}{\text{real GDP}} \times 100$.

Purchasing Power Parity (PPP)

The amount of a country's currency needed to buy the same quantity of local goods and services that can be bought with $1\text{ USD}$.

Business Cycles

Short-term fluctuations in the growth of real output consisting of alternating periods of expansion and contraction.

Recession

A phase of the business cycle characterized by falling real output for $6$ consecutive months or more.

Natural Rate of Unemployment (NRU)

The rate of unemployment that exists when the economy produces at potential output and all resources are used to their maximum extent.

OECD Better Life Index

An economic well-being index based on $11$ indicators selected by member countries to evaluate quality of life and material conditions.

Happiness Index

A measure compiled by the United Nations Sustainable Development Network based on real GDP per capita, social support, healthy life expectancy, freedom to make life choices, generosity, and perceptions of corruption.

Happy Planet Index (HPI)

An index created by the New Economics Foundation that measures sustainable well-being using life expectancy, personal well-being, inequality of outcomes, and ecological footprint.

Aggregate Demand (AD)

The total quantity of real output (real GDP) that all buyers in an economy want to buy at different price levels, ceteris paribus.

Short-run Aggregate Supply (SRAS)

A curve showing the relationship between the price level and the quantity of output produced by firms when resource prices, particularly wages, are fixed.

Recessionary (Deflationary) Gap

A situation where aggregate demand intersects aggregate supply below potential output ($\text{rGDP} < Y_p$), causing unemployment to rise above the natural rate.

Inflationary Gap

A situation where aggregate demand intersects aggregate supply above potential output ($\text{rGDP} > Y_p$), driving unemployment below the natural rate and placing upward pressure on prices.

Stagflation

A macroeconomic condition featuring falling real economic output accompanied by rising price levels (inflation), caused by a decrease in SRAS.

Unemployment

The state of being of working age and actively looking for a job but unable to find one.

Underemployment

A condition referring to working-age individuals who either work part-time but prefer full-time work, or are employed in positions that do not fully utilize their education and skills.

Labour Force

The total number of employed individuals plus unemployed individuals within a population.

Unemployment Rate

The percentage of the labour force that is unemployed, calculated as $\text{Unemployment Rate} = \frac{\text{Number of Unemployed}}{\text{Labour Force}} \times 100$.

Structural Unemployment

Unemployment resulting from changes in demand for specific labour skills, geographical relocation of industries, or labour market rigidities such as minimum wages and union activities.

Frictional Unemployment

Short-term unemployment experienced by individuals who are in between jobs after quitting or being fired.

Seasonal Unemployment

Unemployment that occurs due to predictable seasonal changes in demand for labour, common in agriculture and tourism.

Cyclical Unemployment

Demand-deficient unemployment that occurs during recessions or downturns in the business cycle when falling aggregate demand reduces total demand for labour.

Inflation

A sustained increase in the average price level of goods and services in an economy.

Deflation

A sustained decrease in the average price level of goods and services in an economy.

Disinflation

A decrease in the rate of inflation over time.

Consumer Price Index (CPI)

A measure of the cost of living for a typical household that compares the value of a fixed basket of goods and services in a specific year with its value in a base year.

Demand-pull Inflation

Inflation caused by an excess of aggregate demand over aggregate supply at full employment, shifting the AD curve to the right.

Cost-push Inflation

Inflation caused by a drop in aggregate supply due to increases in wages or input resource costs, shifting the SRAS curve to the left.

The Phillips Curve

A curve demonstrating an inverse relationship between unemployment and inflation in the short run.

Long-run Phillips Curve (LRPC)

A vertical line located at the natural rate of unemployment (NRU), indicating that unemployment is independent of the rate of inflation in the long run.

Economic Growth

An increase in real GDP or real GDP per capita over a specific period of time, calculated as $\text{\% change in rGDP} = \frac{\text{rGDP}_{\text{new}} - \text{rGDP}_{\text{old}}}{\text{rGDP}_{\text{old}}} \times 100$.

Sustainable Debt

A level of government debt where the borrowing government earns sufficient revenues to meet interest and principal repayments while maintaining acceptable economic growth.

Debt Servicing Costs

The compulsory payments required to pay back the principal loan amount plus interest payments.

Economic Inequality

The degree to which individuals in a population differ in their ability to satisfy economic needs due to monetary factors.

Income Inequality

Unequal distribution of income earned from employment, interest, rents, stocks, bonds, and government benefits.

Wealth Inequality

Unequal distribution of total wealth, assets, or property owned across a population.

Lorenz Curve

A diagram plotting cumulative percentage of population against cumulative percentage of income to illustrate income distribution equality.

Gini Coefficient

A summary measure of inequality calculated from the Lorenz curve as $\text{Gini} = \frac{A}{A + B}$, ranging from $0$ (perfect equality) to $1$ (maximum inequality).

Absolute Poverty

A condition where an individual or household lacks sufficient income to satisfy basic human needs, defined by the World Bank as living on less than $1.90\text{ USD}$ per day ($3.00\text{ USD}$ as of $2026$).

Relative Poverty

A comparative measurement defining poverty as having an income below $50\%$ of the national median income.

Multidimensional Poverty Index (MPI)

A poverty measure developed by the UNDP and OPHI evaluating deprivations across health, education, and living standards on a $0$ to $1$ scale.

Direct Taxes

Taxes paid directly to the government on income or wealth, including personal income tax, corporate income tax, wealth tax, and social insurance contributions.

Indirect Taxes

Taxes imposed on spending for goods and services, such as sales tax/VAT, excise taxes, and custom tariffs.

Proportional Taxation

A tax system where the fraction of income paid in tax remains constant as income increases.

Progressive Taxation

A tax system where the fraction of income paid in tax increases as income increases.

Regressive Taxation

A tax system where the fraction of income paid in tax decreases as income increases.

Marginal Tax Rate

The tax rate paid on additional income or the last bracket of income earned, expressed as a percentage.

Average Tax Rate

The total tax paid divided by total income, expressed as a percentage: $\text{Average Tax Rate} = \frac{\text{Total Tax Paid}}{\text{Total Income}} \times 100$.

Transfer Payments

Payments made by the government to individuals for income redistribution purposes without receiving any goods or services in return.

Universal Basic Income (UBI)

A policy providing a fixed regular sum of money to every resident of a country regardless of work status or other income.

Demand-side Policies

Macroeconomic policies (monetary and fiscal) designed to adjust aggregate demand to manage short-term business cycle fluctuations.

Supply-side Policies

Macroeconomic policies focused on enhancing the production side by shifting LRAS or Keynesian AS to the right through increases in resource quality or quantity.

Monetary Policy

A demand-side policy executed by the central bank manipulating money supply and interest rates to affect aggregate demand.

Central Bank

An independent governmental financial authority responsible for conducting monetary policy, regulating commercial banks, and serving as banker to commercial banks and government.

Inflation Targeting

A monetary policy framework where a central bank publicly commits to keeping medium-term inflation within a specific target range (typically $1.5\%$ to $2.5\%$).

Minimum Reserve Requirement (RRR)

The percentage of customer deposits that commercial banks are legally mandated to retain as cash reserves rather than loan out.

Open Market Operations (OMO)

The purchase or sale of government bonds between the central bank and commercial banks to alter interest rates and money supply.

Quantitative Easing

An expansionary monetary policy tool involving large-scale asset purchases by the central bank to expand commercial bank reserves and liquidity.

Real Interest Rate

The interest rate adjusted for inflation, calculated as $\text{Real Interest Rate} = \text{Nominal Interest Rate} - \text{Inflation Rate}$.

Expansionary Monetary Policy

Central bank policy increasing money supply to reduce interest rates and stimulate aggregate demand ($C$ and $I$) to close a recessionary gap.

Contractionary Monetary Policy

Central bank policy decreasing money supply to raise interest rates and decrease aggregate demand ($C$ and $I$) to close an inflationary gap.

Fiscal Policy

A demand-side policy carried out by government altering taxation ($T$) and expenditure ($G$) levels to influence aggregate demand.

Expansionary Fiscal Policy

Fiscal strategy raising government spending ($G$), lowering taxes ($T$), or both, to eliminate a recessionary gap by expanding aggregate demand.

Contractionary Fiscal Policy

Fiscal strategy cutting government spending ($G$), increasing taxes ($T$), or both, to eliminate an inflationary gap by contracting aggregate demand.

Crowding Out Effect

A downside of expansionary fiscal policy where deficit-financed government borrowing raises interest rates, causing private firm investment spending ($I$) to decrease.

Automatic Stabilizers

Automatic institutional economic features, such as progressive taxes and unemployment benefits, that dampen business cycle swings without discretionary government action.

Keynesian Multiplier

The factor by which total real GDP changes following an autonomous change in expenditure, calculated as $\text{Keynesian Multiplier} = \frac{1}{1 - \text{MPC}}$ or $\frac{1}{\text{MPS} + \text{MPT} + \text{MPM}}$.

Marginal Propensity to Consume (MPC)

The fraction of additional household income spent on consuming domestically produced goods and services.

Market-based Supply-side Policies

Supply-side strategies aiming to increase efficiency and potential output by promoting market competition, reforming labour markets, and offering tax incentives.

Interventionist Supply-side Policies

Supply-side strategies relying on active government investment in human capital, physical capital, infrastructure, and industrial development to increase potential output.

Industrial Policies

Interventionist supply-side measures targeted at fostering growth in industrial sectors, supporting small and medium-sized enterprises (SMEs), and protecting infant industries.