Principles of Macroeconomics (Mankiw, 11th Edition)

Comprehensive vocabulary flashcards covering the core principles, graphical models, mathematical identities, and policy concepts of Macroeconomics from N. Gregory Mankiw's Principles of Macroeconomics, 11th Edition.

Scarcity

The limited nature of society's resources, meaning society cannot produce all the goods and services that people desire.

Economics

The study of how society manages its scarce resources.

Efficiency

The property of society getting the greatest benefits from its scarce resources, representing the size of the economic pie.

Equality

The property of distributing economic prosperity uniformly among society's members, representing how evenly the economic pie is sliced.

Opportunity Cost

Whatever must be given up to obtain some item.

Rational People

Individuals who systematically and purposefully do the best they can to achieve their goals, given the available opportunities.

Marginal Change

A small incremental adjustment to an existing plan of action.

Incentive

Something that induces a person to act, such as the prospect of a reward or a punishment.

Market Economy

An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

Externality

The uncompensated impact of one person's actions on the well-being of a bystander, such as pollution.

Market Power

The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.

Productivity

The quantity of goods and services produced from each unit of labor input.

Inflation

An increase in the overall level of prices in the economy.

Business Cycle

Fluctuations in economic activity, such as employment and production.

Circular-Flow Diagram

A visual model of the economy that shows how dollars flow through markets among households and firms.

Production Possibilities Frontier (PPF)

A graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology.

Microeconomics

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

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment, and economic growth.

Positive Statements

Descriptive claims about how the world is, which can be evaluated and tested by examining evidence.

Normative Statements

Prescriptive claims about how the world ought to be, which involve personal values as well as facts.

Slope

The ratio of the vertical distance covered to the horizontal distance covered as we move along a line, calculated as $\frac{\Delta y}{\Delta x}$.

Absolute Advantage

The ability to produce a good using fewer inputs (such as time) than another producer.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer.

Imports

Goods and services produced abroad and sold domestically.

Exports

Goods and services produced domestically and sold abroad.

Competitive Market

A market in which there are many buyers and sellers so that each has a negligible impact on the market price.

Law of Demand

The claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises.

Demand Schedule

A table that shows the relationship between the price of a good and the quantity demanded.

Normal Good

A good for which an increase in income leads to an increase in demand, other things being equal.

Inferior Good

A good for which an increase in income leads to a decrease in demand, other things being equal.

Substitutes

Two goods for which an increase in the price of one leads to an increase in the demand for the other.

Complements

Two goods for which an increase in the price of one leads to a decrease in the demand for the other.

Law of Supply

The claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises.

Equilibrium

A situation in which the market price has reached the level at which quantity supplied equals quantity demanded.

Surplus

A situation in which quantity supplied is greater than quantity demanded, also known as excess supply.

Shortage

A situation in which quantity demanded is greater than quantity supplied, also known as excess demand.

Law of Supply and Demand

The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance.

Gross Domestic Product (GDP)

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

Intermediate Goods

Goods used as components or ingredients in the production of other goods, excluded from GDP to avoid double counting.

Consumption ($C$)

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

Investment ($I$)

Spending on business capital (structures, equipment, intellectual property), residential capital, and inventory accumulations.

Government Purchases ($G$)

Spending on goods and services by local, state, and federal governments, excluding transfer payments.

Net Exports ($NX$)

Spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports), defined as $NX = \text{Exports} - \text{Imports}$.

Nominal GDP

The production of goods and services valued at current prices.

Real GDP

The production of goods and services valued at constant base-year prices, measuring actual physical output.

GDP Deflator

A measure of the price level calculated as $\frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100$.

Consumer Price Index (CPI)

A measure of the overall cost of the goods and services bought by a typical consumer, reported monthly by the Bureau of Labor Statistics.

Core CPI

A measure of the overall cost of consumer goods and services that excludes volatile food and energy prices.

Producer Price Index (PPI)

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

Substitution Bias

The tendency of the CPI to overstate increases in the cost of living because it relies on a fixed basket and misses consumers substituting toward relatively cheaper goods.

Indexation

The automatic correction by law or contract of a dollar amount for the effects of inflation (such as Cost-of-Living Allowances).

Real Interest Rate

The interest rate corrected for the effects of inflation, defined as $\text{Real interest rate} = \text{Nominal interest rate} - \text{Inflation rate}$.

Physical Capital

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

Human Capital

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

Technological Knowledge

Society's understanding of the best ways to produce goods and services.

Diminishing Returns

The property whereby the benefit from an extra unit of an input declines as the quantity of the 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 owned and operated by a foreign entity.

Foreign Portfolio Investment

An investment that is financed with foreign money but operated by domestic residents.

Financial System

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

Bond

A certificate of indebtedness that specifies the obligations of the borrower to the buyer, including date of maturity, rate of interest, and principal.

Stock

A claim to partial ownership in a firm and an entitlement to a portion of its profits.

Financial Intermediaries

Financial institutions through which savers can indirectly provide funds to borrowers, such as commercial banks and mutual funds.

Mutual Fund

An institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds.

National Saving ($S$)

The total income in a closed economy that remains after paying for consumption and government purchases, expressed as $S = Y - C - G$.

Private Saving

The income that households have left after paying for taxes and consumption, calculated as $Y - T - C$.

Public Saving

The tax revenue that the government has left after paying for its spending, calculated as $T - G$.

Crowding Out

A decrease in investment that results when government borrowing from a budget deficit drives up interest rates.

Natural Rate of Unemployment

The normal rate of unemployment around which the unemployment rate fluctuates and which does not go away on its own even in the long run.

Cyclical Unemployment

The deviation of unemployment from its natural rate, closely associated with short-run business cycle fluctuations.

Labor Force

The total number of workers, defined as the sum of the employed and the unemployed.

Unemployment Rate

The percentage of the labor force that is unemployed, calculated as $\frac{\text{Number of unemployed}}{\text{Labor force}} \times 100$.

Labor-Force Participation Rate

The percentage of the adult population that is in the labor force, calculated as $\frac{\text{Labor force}}{\text{Adult population}} \times 100$.

Discouraged Workers

Individuals who would like to work but have given up looking for a job and are consequently counted as out of the labor force.

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 to provide a job for everyone who wants one, often due to wages above equilibrium.

Collective Bargaining

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

Efficiency Wages

Above-equilibrium wages paid by firms to increase worker productivity by improving health, reducing turnover, and boosting effort and worker quality.

Double Coincidence of Wants

The unlikely occurrence that two people each have a good or service that the other wants, required for a trade in a barter economy.

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.

Fiat Money

Money without intrinsic value that is established as money by government decree.

Central Bank

An institution designed to oversee the banking system and regulate the quantity of money in the economy, such as the Federal Reserve.

Fractional-Reserve Banking

A banking system in which banks hold only a fraction of deposits as reserves and lend out the remainder.

Money Multiplier

The amount of money the banking system generates with each dollar of reserves, calculated as the reciprocal of the reserve ratio ($\frac{1}{R}$).

Open-Market Operations

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

Federal Funds Rate

The short-term interest rate at which commercial banks make overnight loans of reserves to one another.

Quantity Theory of Money

A theory asserting that the quantity of money available determines the price level and that the growth rate in the money supply determines the inflation rate.

Classical Dichotomy

The theoretical separation of nominal variables (measured in monetary units) and real variables (measured in physical units).

Monetary Neutrality

The proposition that changes in the money supply do not affect real variables in the long run.

Velocity of Money ($V$)

The rate at which money changes hands, defined by the formula $V = \frac{P \times Y}{M}$.

Quantity Equation

The identity $M \times V = P \times Y$, which relates the money supply ($M$), velocity ($V$), the price level ($P$), and real output ($Y$).

Inflation Tax

The revenue the government raises by creating (printing) money, which acts like a tax on everyone who holds money by eroding its purchasing power.

Fisher Effect

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

Shoeleather Costs

The resources wasted when inflation encourages people to reduce their money holdings and make more frequent trips to the bank.

Menu Costs

The costs of changing prices, including printing and distributing new catalogs, updating price tags, and advertising.

Net Capital Outflow (NCO)

The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners, identical to net exports ($NCO = NX$).

Nominal Exchange Rate

The rate at which a person can trade the currency of one country for the currency of another.