Macroeconomics Exam 2 Vocabulary Study Guide

Comprehensive flashcard deck defining key economic concepts, formulas, and terminology across loanable funds, financial markets, the labor force, and inflation theory.

Economic Investment

The creation or purchase of newly produced physical capital goods, such as tractors, office buildings, data centers, ovens, or new homes, that expand productive capacity.

Saving (in the Loanable-Funds Model)

Making funds available for borrowing by putting money into a bank account or CD, or by acquiring existing financial assets such as purchasing company shares or corporate bonds from another investor.

Interest Rate

The price of spending money now instead of waiting; it represents the financial reward earned by savers for delaying consumption and the opportunity cost or borrowing cost incurred by those who spend today.

Rate of Return on a Project

The percentage gain of an investment calculated as $\frac{\text{Payoff} - \text{Cost}}{\text{Cost}} \times 100\%$, where a project is undertaken only if this return exceeds the market interest rate.

Crowding Out

The reduction in private investment borrowing that occurs when increased government borrowing shifts the demand for loanable funds to the right, driving up equilibrium interest rates.

Real Interest Rate

The interest rate adjusted for the effect of inflation, reflecting the true growth of purchasing power; calculated approximately as the nominal interest rate minus the inflation rate.

Bank Spread

The profit margin a commercial bank earns, defined as the interest revenue collected from borrowers minus the interest paid out to depositors and operating costs.

Federal Funds Rate

The interest rate that commercial depository institutions charge one another for overnight loans of unpledged reserves.

Discount Rate

The interest rate charged to commercial banks when borrowing reserves directly from the Federal Reserve discount window, which frequently carries a negative market stigma.

Collateral

A specific property or asset pledged by a borrower as security for a loan, which the lender can repossess if the borrower fails to make payments.

Expected Payoff

The probability-weighted sum of all potential financial outcomes on a risky loan or investment, calculated by adding each possible payoff multiplied by its likelihood of occurring.

Risk Premium

The difference between a loan's promised yield and its expected return, or the excess expected return demanded above a safe benchmark rate to compensate for bearing default risk.

Bond Yield

The actual rate of return earned by holding a debt security, which for a one-year zero-coupon bond equals $\frac{\text{Face Value} - \text{Price}}{\text{Price}} \times 100\%$.

Bond Price-Yield Relationship

The strict inverse financial relationship dictating that when market interest rates or yields increase, existing bond prices decrease, and vice versa.

Arbitrage

The market process wherein investors purchase underpriced assets and sell overpriced assets of equivalent risk and timing until price movements equalize their rates of return.

Present Value

The current equivalent value of an amount of money to be received in the future, calculated by discounting the future payment by $\text{PV} = \frac{\text{Future Payment}}{(1 + r)^n}$.

Residual Claimant

A common stockholder who holds legal entitlement to a corporation's earnings and net assets only after all senior claims, including debts to bondholders and lenders, are fully settled.

Employed

An adult who performed any paid work during the official survey week, including part-time labor, or who held a job from which they were temporarily absent.

Unemployed

An adult who currently has no job, is available to work, and has actively engaged in job search activities within the prior four weeks, or is on temporary layoff awaiting recall.

Not in the Labor Force

Non-institutionalized adults who do not hold a job and are not actively searching for work, such as retirees, full-time students, and discouraged workers who ceased searching.

Labor Force

The total aggregate of all adult individuals within an economy who are either employed or actively seeking work: $\text{Labor Force} = \text{Employed} + \text{Unemployed}$.

Unemployment Rate

The proportion of active labor force members who do not currently have employment, calculated as $\frac{\text{Unemployed}}{\text{Labor Force}} \times 100\%$.

Labor-Force Participation Rate

The proportion of the civilian adult population participating in the labor market, expressed as $\frac{\text{Labor Force}}{\text{Adult Population}} \times 100\%$.

Frictional Unemployment

Temporary unemployment that naturally occurs due to the time and effort required for workers and firms to search, match, and fill available vacancies.

Structural Unemployment

Long-term unemployment caused by institutional wage barriers, labor regulations, or fundamental mismatches between the skills workers possess and the skills employers demand.

Cyclical Unemployment

Unemployment directly attributable to macroeconomic downturns and output contractions; calculated as the actual unemployment rate minus the natural unemployment rate.

Natural Unemployment Rate

The base level of unemployment consistent with long-run macroeconomic equilibrium, defined as the sum of frictional and structural unemployment.

Binding Minimum Wage

A legal price floor established above the market-clearing equilibrium wage, creating an excess supply of labor (unemployment) because job seekers exceed positions offered.

Reservation Wage

The absolute lowest wage threshold at which an unemployed job seeker is willing to accept a given job offer rather than continue searching.

Okun's Law

The empirical observation that approximately $2.4\%$ to $2.5\%$ real GDP growth maintains a constant unemployment rate, and each $1$ percentage point shift away from this growth pace changes unemployment by about $0.5$ percentage points in the opposite direction.

Inflation

A sustained and widespread increase in the general average level of prices across an entire economy, as opposed to an isolated price adjustment in a single good.

Disinflation

A reduction in the overall rate of inflation such that price increases slow down while remaining strictly positive.

Deflation

A sustained decrease in the general average price level, mathematically identified by a negative inflation rate.

Consumer Price Index (CPI)

A price metric published by the Bureau of Labor Statistics (BLS) tracking price fluctuations for a fixed basket of consumer goods and services typically purchased by urban households.

Personal Consumption Expenditures (PCE) Price Index

A comprehensive consumption price index published by the Bureau of Economic Analysis (BEA) that accounts rapidly for consumer substitution and employer-paid healthcare; the Federal Reserve targets $2\%$ headline PCE inflation.

Core Inflation

An inflation metric that deliberately strips out volatile food and energy components to capture underlying persistent price trends.

Velocity of Money

The annual turnover rate indicating how many times an average unit of currency is spent on final purchases, calculated as $\frac{\text{Spending in a year}}{\text{Average money held}}$.

Quantity Equation

The fundamental monetary identity $M \times v = P \times Y$, stating that total dollar spending (money supply $M$ times velocity $v$) equals nominal GDP (price level $P$ times real output $Y$).

Quantity Theory of Money (Growth-Rate Version)

The macroeconomic proposition stating that inflation approximately equals the money growth rate plus the velocity growth rate minus real GDP growth: $\text{Inflation} \approx g_M + g_v - g_Y$.

Rule of 70

A mathematical guideline stating that the number of years required for an economic variable to double in size is approximately equal to $\frac{70}{\text{Annual Growth Rate (\%)}}$.