Macroeconomics: GDP, Fiscal Policy, and Unemployment

Vocabulary and key formulas covering GDP components, fiscal policy multipliers, inflation indices, and unemployment types based on the provided lecture notes.

Consumption (C)

Household spending money.

Disposable Income

The money left over after the government takes taxes ($T$), represented as $(Y - T)$.

Consumption Formula

$$C = a + b(Y - T)$$

Autonomous Consumption (a)

The spending needed in order to survive, such as food and water.

Marginal Propensity to Consume (MPC)

Represented by ($b$) as a fraction between 0-1, it is the portion of additional income that is spent rather than saved.

Planned Investment (I)

How businesses spend money on items like machinery, factories, and software, usually using loans.

Real Interest Rate (r) Relationship

A negative relationship where an increase in interest rates ($r \text{ increases}$) makes borrowing more expensive, leading to a drop in investment ($I \text{ drops}$).

Planned Expenditure (PE)

What households, firms, and the government intend to spend.

Actual Expenditure (Y)

What firms actually produced and sold.

Unplanned Inventories (Alnu)

The difference between what was produced and what was sold; they accumulate ($Alnu > 0$) when firms produce too much ($Y > PE$) and fall ($Alnu < 0$) when firms produce too little ($Y < PE$).

IS Curve Conclusion

A higher interest rate ($r \text{ increases}$) results in lower economic output ($Y \text{ decreases}$).

Fiscal Policy

When the government changes its own Government Purchases ($G$) or alters Taxes ($T$) to influence total output ($Y$).

Expansionary Fiscal Policy

Policy used during a recession to boost the economy by increasing spending ($G \text{ increases}$) or cutting taxes ($T \text{ decreases}$).

Contractionary Fiscal Policy

Policy used when inflation is too high to slow the economy by decreasing spending ($G \text{ decreases}$) or raising taxes ($T \text{ increases}$).

Government Purchase Multiplier

$$\text{AY} = \frac{1}{1 - MPC} \times \text{4G}$$

Tax Multiplier

$$\text{AY} = \frac{-MPC}{1 - MPC} \times \text{4T}$$

Budget Deficit

Occurs when the government spends more than it collects in taxes ($G > T$), resulting in debt.

Budget Surplus

Occurs when the government collects more in taxes than it spends ($T > G$), leaving extra cash.

Cyclical Deficit

The extra deficit that happens purely because the economy hit a downturn.

CPI (Consumer Price Index)

Measures only things bought by consumers using a fixed basket that includes imports.

GDP Deflator

Measures all goods produced domestically using a basket that changes based on today's production; excludes imports.

Federal Reserve (Fed) Interest Rate Policy

The Fed raises rates to fight inflation and cuts rates down to fight unemployment.

M1

A category of money supply with high liquidity that is easy to get as cash.

M2

A category of money supply that is highly secure but takes more effort to spend, such as Discover Savings.

Frictional Unemployment

When workers are in between jobs, such as quitting for a better or more suitable position.

Structural Unemployment

When worker skills become useless, such as being replaced by a robot.

Cyclical Unemployment

Unemployment resulting from a recession where the demand for workers decreases.