Macroeconomics Lecture: Aggregate Demand, Fiscal & Monetary Policy, and Exchange Rates

100 vocabulary flashcards summarizing essential macroeconomic terms and definitions from the lecture notes.

Keynesian Economics

Economic theory advocating active government intervention to manage aggregate demand and prevent or lessen recessions.

Aggregate Demand (AD)

Total planned spending on a nation’s goods and services at different price levels; represented by AD = C + I + G + X – M.

Aggregate Supply (AS)

Total quantity of goods and services producers are willing and able to supply at different price levels.

Fiscal Policy

Government actions that change taxes, transfer payments, or spending to influence aggregate demand.

Monetary Policy

Central-bank actions that alter the money supply or interest rates to influence economic activity.

Exchange Rate

The price of one currency in terms of another in the foreign exchange market.

Tariff

A tax imposed on imported (or sometimes exported) goods to raise prices and restrict trade.

Import Tariff

A tax levied on goods entering a country, often to protect domestic industries.

Export Tariff

A tax placed on goods leaving a country; used far less commonly than import tariffs.

Protectionism

Policy of using trade barriers like tariffs to shield domestic producers from foreign competition.

Revenue Generation (Tariffs)

The use of tariffs to raise funds for government budgets.

Trade War

A cycle of retaliatory tariff increases between trading nations.

Real GDP

Inflation-adjusted value of all final goods and services produced in an economy.

Consumption Expenditure (C)

Household spending on goods and services within GDP.

Investment (I)

Business spending on capital goods and inventories plus residential construction.

Government Expenditure (G)

Government purchases of goods and services included in GDP.

Exports (X)

Goods and services produced domestically and sold abroad.

Imports (M)

Goods and services produced abroad and purchased domestically.

Aggregate Demand Curve

Graph showing the inverse relationship between the price level and quantity of real GDP demanded.

Price Level

A measure of average prices of goods and services, often the GDP price index.

Aggregate Demand Multiplier

Process through which an initial change in spending leads to a larger change in aggregate demand.

Induced Consumption

Additional household spending that results from higher income during a multiplier process.

Recessionary Gap

Amount by which real GDP falls short of potential GDP.

Inflationary Gap

Amount by which real GDP exceeds potential GDP, putting upward pressure on prices.

Automatic Fiscal Policy

Budget changes triggered automatically by economic conditions, not new legislation.

Discretionary Fiscal Policy

Deliberate legislative changes in government spending or taxation.

Automatic Stabilizers

Budget components—like progressive taxes and unemployment benefits—that counter business-cycle fluctuations without new laws.

Induced Taxes

Taxes whose revenue rises and falls with changes in real GDP.

Fiscal Stimulus

Expansionary fiscal action designed to raise aggregate demand and close a recessionary gap.

Cash for Clunkers

Example of a discretionary fiscal stimulus program encouraging auto purchases.

Potential GDP

Level of output an economy can produce at full employment without accelerating inflation.

Supply-Side Effects

Impacts of policies (e.g., tax cuts) that shift aggregate supply and potential GDP.

Crowding Out

Reduction in private investment due to higher interest rates caused by government borrowing.

Lucas Wedge

Cumulative loss of output resulting from slower growth when investment is crowded out.

Budget Deficit

Excess of government outlays over revenues within a given period.

National Debt

Total accumulation of past federal budget deficits minus surpluses.

Dual Mandate

Federal Reserve goals of stable prices and maximum sustainable employment.

Maximum Employment

Economic condition where real GDP is close to potential and unemployment equals its natural rate.

Stable Prices

Objective of maintaining a low and steady inflation rate.

Monetary Policy Instrument

Variable a central bank directly controls (e.g., federal funds rate) to influence the economy.

Monetary Base

Sum of currency in circulation and bank reserves controlled by the central bank.

Federal Funds Rate

Interest rate banks charge each other for overnight reserve loans in the U.S.

Overnight Policy Rate

Malaysian term analogous to the U.S. federal funds rate.

FOMC

Federal Open Market Committee, the Fed body setting U.S. monetary policy.

Interest Rate Differential

Difference between domestic and foreign interest rates influencing currency flows.

Monetary Policy Transmission

Sequence of effects from a central-bank action to changes in output and inflation.

Exchange Rate Appreciation

Increase in the value of a currency relative to others.

Exchange Rate Depreciation

Decrease in the value of a currency relative to others.

Short-Term Interest Rate

Rate on financial instruments with maturities of one year or less; moves quickly with policy changes.

Long-Term Real Interest Rate

Inflation-adjusted rate on long-term loans/bonds affected by monetary policy over time.

Loanable Funds Market

Market where savers supply funds and borrowers demand them; sets real interest rates.

Policy Time Lags

Delays between a policy action (e.g., Fed rate change) and its full economic impact.

Foreign Exchange Market

Global marketplace where currencies are bought and sold.

Demand for Dollars

Amount of U.S. currency foreign traders want to buy at various exchange rates.

Supply of Dollars

Amount of U.S. currency holders want to sell for foreign currency at various rates.

Exports Effect (Demand)

Lower exchange rates make U.S. goods cheaper abroad, raising exports and dollar demand.

Expected Profit Effect (Demand)

If holding dollars seems more profitable, demand for dollars rises even at a given rate.

Imports Effect (Supply)

Higher exchange rates make foreign goods cheaper, increasing U.S. imports and dollar supply.

Market Equilibrium (FX)

Exchange-rate level where quantity of dollars demanded equals quantity supplied.

Surplus of Dollars

Excess supply of dollars in FX market causing downward pressure on the exchange rate.

Shortage of Dollars

Excess demand for dollars in FX market causing upward pressure on the exchange rate.

Aggregate Demand Increase

Rightward shift of the AD curve due to higher spending plans.

Aggregate Demand Decrease

Leftward shift of the AD curve due to lower spending plans.

Expectations About the Future

Changes in anticipated income, inflation, or profits that shift aggregate demand.

Fiscal-Policy Determinant (AD)

Tax and spending changes that modify aggregate demand independently of price level.

Monetary-Policy Determinant (AD)

Interest-rate or money-supply changes that influence aggregate demand.

World Economy State (AD)

Foreign income and exchange-rate movements that affect a nation’s aggregate demand.

U.S. Interest Rate Differential

Gap between U.S. and foreign rates that shifts currency demand and supply.

Expected Future Exchange Rate

Anticipation of future currency values influencing today’s FX demand and supply.

Tax Cut

Reduction in tax rates that raises disposable income and can boost AD and AS.

Transfer Payments

Government payments (e.g., unemployment benefits) made without receiving goods/services.

Government Outlays

Total government spending including goods, services, and transfers.

Cyclical Budget Balance

Portion of the budget balance caused by the economy’s position in the business cycle.

Structural Budget Balance

Budget balance adjusted for business-cycle effects, revealing underlying fiscal stance.

Successful Fiscal Stimulus

Policy that closes a recessionary gap and restores full employment without excess inflation.

Automatic Restraint

Budget changes during a boom that dampen an inflationary gap via rising taxes and lower transfers.

Monetary Tightening

Fed action raising the federal funds rate to curb inflation.

Monetary Easing

Fed action lowering the federal funds rate to stimulate economic activity.

Expenditure Plans

Household, business, government, and foreign intentions to buy goods and services.

Aggregate Demand Basics

Inverse price level–output relationship assuming other influences on spending remain constant.

Rightward AD Shift

Movement indicating increased aggregate demand at every price level.

Leftward AD Shift

Movement indicating decreased aggregate demand at every price level.

Multiplier Effect

Process where an initial spending change leads to a larger change in total output.

Investment Increase Effect

Rise in investment that triggers multiple rounds of spending and greater AD expansion.

Induced Expenditure

Spending that results from increases in income generated by initial expenditure changes.

Foreign Income (AD)

Rising foreign GDP increases demand for domestic exports, shifting AD rightward.

Exchange-Rate Fall (AD)

Depreciation making exports cheaper and imports dearer, boosting aggregate demand.

Exchange-Rate Rise (AD)

Appreciation making exports costlier and imports cheaper, reducing aggregate demand.

Interest Rates & FX

Higher domestic rates attract capital inflows, affecting currency demand and exchange rates.

Supply in FX Market

Quantity of domestic currency offered for sale in exchange for foreign currency.

Law of Demand for FX

Higher exchange rates lower quantity of currency demanded, ceteris paribus.

Law of Supply for FX

Higher exchange rates raise quantity of currency supplied, ceteris paribus.

Expected Profit (Dollars)

Anticipated gain from holding dollars; rises when expected future exchange rate is higher.

Expected Profit (Foreign Currency)

Anticipated gain from holding foreign currency; rises when domestic currency is expected to fall.

Imports

Foreign goods and services purchased by residents of a country.

Exports

Domestically produced goods and services sold to foreigners.

Interest Rate Changes

Immediate result of FOMC decisions; impact other financial variables quickly.

Exchange Rate Changes (Policy)

Currency value shifts following relative interest-rate movements due to monetary policy.

Money and Bank Loans

Credit creation process affected when the central bank alters reserves.

Real GDP Growth Rate

Percentage change in real GDP; responds to monetary policy after about one year.