Macroeconomics: National Income, Growth, Unemployment, Inflation, and the IS-LM Model

Comprehensive vocabulary flashcards covering macroeconomics fundamentals, national income accounting, economic growth theories, labour market statistics, inflation indices, goods and financial market equilibria, and the IS-LM framework with visual graphical derivations.

Gross Domestic Product (GDP)

The market value of final goods and services produced within a country in a given time period (quarterly or annually).

Unemployment Rate

The percentage of the people in the labour force who are unemployed and actively seeking work.

Inflation Rate

The sustained rise in general price levels in an economy within a stipulated period of time, measured as the percentage change in the Consumer Price Index (CPI).

Potential GDP

The level of real GDP that an economy is able to produce when all its production factors (labour, capital, land, and entrepreneurship) are fully employed while avoiding rising inflation.

Business Cycle

Irregular but periodic up-and-down movements of total production and other measures of economic activity around potential GDP, characterized by two phases (recession and expansion) and two turning points (peak and trough).

Rule of 70

A mathematical rule stating that the number of years it takes for the level of any variable to double is approximately equal to $70$ divided by the annual percentage growth rate of that variable ($\frac{70}{\text{growth rate}}$).

Depreciation

The decrease in the value of a firm's capital that results from wear and tear and obsolescence.

Statistical Discrepancy

The calculated gap between the income approach and the expenditure approach when measuring GDP, computed as: $\text{GDP (Income approach)} - \text{GDP (expenditure approach)}$.

Nominal GDP

The value of final goods and services produced in a given year when valued at the prices of that specific year.

Real GDP

The value of final goods and services produced in a given year when valued at the prices of a reference base year, thereby excluding the influence of price level changes.

Aggregate Production Function

The relationship showing how real GDP changes as the quantity of labour changes when all other influences on production remain constant.

Marginal Product of Labour

The additional real GDP produced by an additional hour of labour when all other production factors remain unchanged.

Labour Productivity

The quantity of real GDP produced by an hour of labour, calculated as: $\text{Real GDP} \div \text{Aggregate labour hours}$.

Classical Dichotomy

The macroeconomic principle that at full employment, the forces that determine real variables are independent of those that determine nominal variables.

Classical Growth Theory

The theory stating that the growth of real GDP per person is temporary and that when it rises above subsistence level, an induced population explosion eventually forces real GDP per person back down to the subsistence level.

Neoclassical Growth Theory

The theory asserting that real GDP per person grows because technological changes induce saving and investment that cause capital per hour of labour to increase.

New Growth Theory

The theory proposing that real GDP per person grows continuously because of the choices people make in the pursuit of profit, allowing growth to persist indefinitely.

Labour Force

The sum of employed persons and unemployed persons within the working-age population.

Absorption Rate

The percentage of people of working age who have jobs; also known as the employment-to-population ratio.

Labour Force Participation Rate (LFPR)

The percentage of the working-age population who are active members of the labour force.

Discouraged Worker

A marginally attached worker who has ceased looking for work because of repeated failure to secure a job.

Frictional Unemployment

Unemployment that arises from normal labour market turnover, including the ongoing processes of job creation, job destruction, and workers entering or leaving the workforce.

Structural Unemployment

Unemployment that arises when changes in technology or international competition permanently alter the skills required to perform jobs or shift the geographic locations of employment.

Cyclical Unemployment

The fluctuation in unemployment caused by business cycles, characterized by higher-than-normal unemployment at a trough and lower-than-normal unemployment at a peak.

Natural Unemployment Rate

The unemployment rate that prevails when cyclical unemployment is zero, meaning that all existing unemployment is strictly frictional and structural.

Hyperinflation

An extreme inflation rate of $50\%$ per month or higher.

Consumer Price Index (CPI)

An index measuring the average price of goods and services paid by urban consumers in $30$ metropolitan areas for a fixed basket of consumer goods and services, defined as equal to $100$ for the reference base period.

GDP Deflator

A price index measuring the overall price level based on all goods and services counted in GDP, calculated as: $\left(\frac{\text{Nominal GDP}}{\text{Real GDP}}\right) \times 100$.

Okun's Law

An empirical regularity stating that when output growth is sufficiently high, unemployment will decrease.

Output Gap

The difference between real GDP and potential GDP; it equals zero at full employment, is positive when real GDP exceeds potential GDP, and is negative when real GDP is below potential GDP.

Phillips Curve

A relationship showing the inverse trade-off between the change in inflation and the unemployment rate, indicating that inflation tends to increase as unemployment decreases.

Autonomous Spending

The component of aggregate demand ($c_0 + I + G - c_1 T$) in the goods market that does not depend on the level of income or output ($Y$).

Multiplier

The factor $\frac{1}{1 - c_1}$ that multiplies autonomous spending to determine equilibrium output in the goods market, causing the total change in output to exceed the initial spending change.

Goods Market Equilibrium

The condition where aggregate demand ($ZZ$) equals total production ($Y$), illustrated at the intersection with the $45^\circ$ line where the vertical intercept represents autonomous spending and the slope equals the marginal propensity to consume ($c_1$).

Multiplier Effect in the Goods Market

The dynamic adjustment process in which an initial autonomous increase in spending (such as $\$1\text{ billion}$) shifts the demand curve upward from $ZZ$ to $ZZ'$, sparking successive rounds of production increases and induced consumption to reach a higher equilibrium at point $A'$.

Money Market Equilibrium

The financial market condition where the fixed money supply ($M^s$), determined by the central bank, equals money demand ($M^d$), establishing the equilibrium interest rate ($i$) at point $A$.

Financial Market Effect of Money Supply Expansion

A rightward shift of the vertical money supply curve from $M^s$ to $M^{s\prime}$ that reduces the equilibrium nominal interest rate from $i$ to $i'$ along the downward-sloping money demand curve ($M^d$).

Derivation of the IS Curve

The analytical process showing that an increase in the interest rate from $i$ to $i'$ depresses investment and shifts the goods market demand curve down from $ZZ$ to $ZZ'$, lowering equilibrium output from $Y$ to $Y'$ and generating a downward-sloping IS relation.

Leftward Shift of the IS Curve

The displacement of the IS curve to the left (from $IS$ to $IS'$) caused by factors that reduce the aggregate demand for goods at any given interest rate, such as an increase in taxes ($T' > T$) or a cut in government spending.

Downward Shift of the LM Curve

The downward movement of the LM curve from $LM$ to $LM'$ resulting from an increase in the real money supply ($M'/P > M/P$), which lowers the interest rate required to equilibrate financial markets at each level of income.

IS-LM Model Equilibrium

The simultaneous macroeconomic equilibrium of both the goods market (IS curve) and financial markets (LM curve) at point $A$, determining the simultaneous values of aggregate output ($Y$) and interest rate ($i$).

Fiscal Contraction in the IS-LM Model

A fiscal policy measure, such as an increase in taxes ($T' > T$), that shifts the IS curve leftward to $IS'$, thereby reducing equilibrium output to $Y'$ and lowering the equilibrium interest rate to $i'$.

Monetary Expansion in the IS-LM Model

A monetary policy action that increases the real money supply ($M'/P > M/P$), shifting the LM curve down to $LM'$ and causing equilibrium output to rise to $Y'$ while lowering the interest rate to $i'$.

Liquidity Trap

A macroeconomic condition where nominal interest rates reach the zero lower bound ($i = 0$), causing monetary policy to become ineffective because further increases in the money supply have no effect on interest rates.

Policy Mix

The strategic combination of monetary and fiscal policies applied concurrently to address specific macroeconomic objectives, such as pairing fiscal consolidation with monetary expansion to combat a recession.