Macroeconomics Lecture Flashcards

A complete set of vocabulary flashcards covering key terms and concepts from the macroeconomics lecture, including definitions for core indicators, monetary systems, and economic models.

Macroeconomics

The study of the entire economy as a whole, focusing on economy-wide phenomena such as inflation, unemployment, and economic growth.

Microeconomics

The study of how individual households and firms make decisions and how they interact in the specific markets.

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country in a given period of time.

Consumption (C)

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

Investment (I)

Spending on capital equipment, structures, and inventories, including household purchases of new housing.

Government Purchases (G)

Spending on goods and services by all levels of government (local, state and federal).

Net Exports (NX)

The value of domestically produced goods sold to foreigners (exports) minus the value of foreign goods bought by domestic residents (imports).

Nominal GDP

The production of goods and services valued at current-year prices.

Real GDP

The production of goods and services valued at a constant price from a designated base year.

Base year

The specific year from which prices are used to measure real GDP, serving as a benchmark for comparison.

Gross National Product

The total income earned by a nation’s permanent residents (nationals), regardless of where the production takes place.

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, which better reflects underlying inflation trends.

Producer Price Index (PPI)

A measure of the cost of a basket of goods and services bought by firms rather than consumers.

Substitution Bias

A measurement problem where the CPI overstates the cost of living because it fails to account for consumers’ ability to switch relatively cheaper goods when price rises.

Indexation

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

Cost of Living Allowance

A specific contract provision (often in labor agreements) that automatically raises wages then the CPI rises.

Nominal Interest rate

The interest rate is usually reported by a bank, which is not corrected for the effects of inflation.

Real Interest Rate

The interest rate corrected for the effects of inflation, calculated as the nominal interest rate minus the inflation rate.

Unmeasured Quality Change

A CPI measurement problem where if the quality of a product improves while its price remains the same, the value of a dollar rises; conversely, if quality deteriorates, the value of a dollar falls.

Real GDP per person

The quantity of goods and services available for the average individual in the economy.

Growth rate

The annual percentage change in output.

Compound growth

The application of each year’s growth to the previous year’s accumulated growth.

Rule of 70

A mathematical rule stating that a variable growing at $x$ percent per year will double in approximately $70/x$ years.

Productivity

The quantity of goods and services that a worker can produce per hour.

Physical capital

The stock of equipment and structures used to produce goods and services.

Factors of production

The inputs used to produce goods and services, such as labor, capital, and natural resources.

Human capital

The intangible knowledge and skills that workers acquire through education, training, and experience.

Natural resources

Inputs into production that are provided by nature, such as land, rivers, and mineral deposits.

Renewable resource

A natural resource that can be reproduced or replanted, such as a forest.

Nonrenewable resource

A natural resource that is limited in supply and cannot be replaced once depleted, such as oil.

Technological Knowledge

A society’s understanding about the best ways (or "recipes") to produce goods and services.

Production function

The mathematical relationship between the quantity of inputs used and the quantity of output produced.

Constant returns to scale

A property of a production process where doubling all of the inputs results in exactly doubling the output.

Diminishing returns

The property whereby the benefit from an extra unit of an input (like capital) declines as the quantity of that input increases.

Catch-up effect

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

Foreign direct investment

A capital investment that is both owned and operated by a foreign entity.

Foreign portfolio investment

A capital investment financed with foreign money but operated by domestic residents.

Externality

The uncompensated impact of one person’s or firm's actions on the well-being of a bystander.

Property rights

The ability of individuals to exercise control over the resources they own.

Infant-industry argument

The claim that fledgling domestic industries need temporary trade protection to help them grow and compete with foreign firms.

Inward-oriented policies

Economic policies that aim to increase productivity and growth by shielding domestic industry from foreign competition (e.g., trade restrictions).

Outward-oriented policies

Economic policies that promote integration into the world economy by decreasing international trade restrictions.

Public good

A good that individuals may all use at the same time without diminishing another person's benefits from it.

Financial System

The group of institutions in the economy that help match one person’s saving with another person’s investment.

Financial Markets

Institutions through which a person who wants to save can directly provide funds to a person who wants to borrow.

Bond

A certificate of indebtedness that specifies the obligations of the borrower to the holder; an IOU.

Stock

A claim to partial ownership in a firm and a claim to a portion of the profits the firm makes.

Equity Finance

The sale of stock to raise money.

Debt Finance

The sale of bonds to raise money.

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 selection, or portfolio, of various stocks and bonds.

National Saving

The total income in the economy that remains after paying for consumption and government purchases ($S = Y - C - G$).

Private Saving

The income that households have left after paying for taxes and consumption ($Y - T - C$).

Public Saving

The tax revenue that the government has left after paying for its spending ($T - G$).

Budget Surplus

An excess of tax revenue over government spending.

Budget Deficit

A shortfall of tax revenue from government spending.

Investment (Macroeconomic)

In macroeconomics, the purchase of new capital, such as equipment, structures, or new housing.

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 private investment that results from government borrowing.

Present Value

The amount of money needed today to produce a given future sum at current interest rates.

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, often associated with short-run economic fluctuations.

Labor Force

The total number of workers, which is the sum of the unemployed and the employed.

Unemployment Rate

The percentage of the labor force that is unemployed.

Labor-Force Participation Rate

The percentage of the total adult population that is in the labor force.

Discouraged Workers

Individuals who stop looking for work due to an unsuccessful search.

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 for everyone who wants one.

Collective Bargaining

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

Efficiency Wages

Above-equilibrium wages voluntarily paid by firms to increase worker productivity.

Money

The set of assets in an economy that people regularly use to buy goods and services from other people.

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 (e.g., gold).

Fiat Money

Money without intrinsic value that is established by government decree.

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.

Money Supply

The quantity of money available in the economy.

Monetary Policy

Decisions by the central bank concerning the money supply.

Open-Market Operations

The purchase and sale of U.S. government bonds by the Fed to alter the money supply.

Fractional-Reserve Banking

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

Money Multiplier

The amount of money the banking system generates from each dollar of reserves.

Inflation

An increase in the overall level of prices.

Deflation

A decrease in the overall level of prices.

Hyperinflation

Extraordinarily high inflation.

Quantity Theory of Money

The theory that the quantity of money determines prices and the growth rate of money determines inflation.

Nominal Variables

Variables measured in monetary units (e.g., dollar prices).

Real Variables

Variables measured in physical units (e.g., real GDP, relative prices).

Classical Dichotomy

The theoretical separation of nominal and real variables.

Monetary Neutrality

The property that changes in the money supply affect nominal variables but not real variables.

Velocity of Money

The rate at which money changes hands.

Quantity Equation

The identity $M \times V = P \times Y$, relating money and nominal output.

Inflation Tax

The revenue the government raises by creating (printing) money.

Fisher Effect

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

Shoeleather Costs

Resources wasted when inflation encourages people to reduce their money holdings.

Menu Costs

The costs associated with changing prices.