Macroeconomics Practice Questions & Key Concepts

Vocabulary flashcards based on Midterm 1 practice question set covering national income accounting, production functions, labor markets, saving and investment, and inflation measures.

Circular Flow Diagram

An economic model showing how firms receive revenue from the goods market and use it to purchase inputs in the factor market.

Gross Domestic Product (GDP)

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

Crowding Out

An economic mechanism in which an increase in government spending increases the real interest rate and decreases private investment.

Labor-Force Participation Rate

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

Constant Returns to Scale

A property of a production function where an equal percentage increase in all factors of production leads to an identical percentage increase in total output.

Decreasing Returns to Scale

A production function property where increasing both capital and labor inputs by a specific percentage (such as $10\%$) results in a smaller percentage increase in total output (such as $5\%$).

Increasing Returns to Scale

A production function property where increasing capital and labor inputs by a given percentage (such as $5\%$) leads to a larger percentage increase in total output (such as $10\%$).

Flexible Price

A price that adjusts rapidly in response to changes in supply and demand conditions, such as the retail price of gasoline.

Sticky Price

A price or wage that is slow to adjust in the short run in response to changing economic conditions, such as magazine newsstand prices.

Production Function

A mathematical relationship, represented as $Y = G(K, L)$, describing how inputs like capital ($K$) and labor ($L$) determine total economic output ($Y$).

Assortative Mating

A social and economic pattern where individuals with similar characteristics or income levels partner together, such as high earners marrying other high earners.

Flow Variable

An economic variable measured per unit of time, such as annual automobile purchases, business expenditures, or job losses.

Stock Variable

An economic variable measured at a specific point in time, such as the total government debt.

GDP Deflator

A price index calculated as the ratio of nominal $GDP$ to real $GDP$, representing changes in the overall price level of all domestically produced final goods and services.

Consumer Price Index (CPI)

A fixed-weight price index measuring the cost of a fixed market basket of goods and services purchased by a typical consumer.

Gini Coefficient

A measure of income distribution inequality ranging from $0$ (representing perfect income equality) to $1$ (representing perfect income inequality).

Endogenous Variables

Variables that an economic model seeks to explain and whose values are determined within the model.

Exogenous Variables

Variables whose values are determined outside of an economic model and act as inputs to the model.

Value Added

The value of a firm's output minus the cost of the intermediate goods purchased to produce that output.

Core Inflation Rate

A measure of inflation that excludes volatile food and energy prices to reflect long-term underlying price trends.

Real Wage

The purchasing power of labor income measured in physical units of output rather than in nominal monetary terms.

Marginal Propensity to Consume (MPC)

The fraction of an additional dollar of disposable income that a household spends on consumption, typically taking a value between $0$ and $1$.

Public Saving

The difference between government revenue (taxes minus transfers) and government purchases, calculated as $T - G$.

Private Saving

The portion of disposable income that households do not spend on consumption, calculated as $Y - T - C$.

National Saving

Total economic saving equal to the sum of private saving and public saving, represented by $S = Y - C - G$.

Paasche Index

A price index, such as the $GDP$ deflator, that uses a changing basket of current-year quantities as weights.

Laspeyres Index

A price index, such as the $CPI$, that uses a fixed basket of base-year quantities as weights.

Neoclassical Theory of Distribution

An economic theory asserting that factors of production are paid according to their marginal productivity, implying workers gain real wage growth when labor productivity grows rapidly.

Government Spending Cut Equilibrium Shift

In the classical saving-investment model starting at equilibrium point $E$, a cut in government spending increases national saving (shifting vertical line $S_1$ to $S_3$), establishing a new equilibrium at point $B$ with lower real interest rate $r_3$ and higher investment.

Effect of Increased Saving on Real Interest Rate

An increase in national saving shifts the supply curve rightward from $S_1$ to $S_2$, reducing the equilibrium real interest rate from $r_1$ to $r_2$ and expanding equilibrium investment from $S_1 = I_1$ to $S_2 = I_2$.