Macroeconomics Exam Review – Chapters 8-10

Vocabulary flashcards summarizing the key economic concepts, definitions, and relationships from Chapters 8–10 lecture notes to support exam review.

Unemployment Rate

The percentage of the labor force that is unemployed—people not working but actively seeking work.

Discouraged Workers

Individuals who have stopped looking for employment; including them in calculations would lower the reported unemployment rate.

Labor Force Participation Rate

The share of the adult population (16+) that is either employed or actively seeking work.

Out of the Labor Force

Adults who are neither working nor actively searching for work.

Unemployed

A person not currently working but actively searching for a job.

Understated Unemployment Rate

A rate that is too low because active job seekers are misclassified as out of the labor force.

Frictional Unemployment

Short-term unemployment that arises from voluntary job changes or new entrants searching for work.

Structural Unemployment

Joblessness caused by technological change or mismatched skills between workers and jobs.

Cyclical Unemployment

Unemployment that rises during economic recessions and falls when the economy improves.

Underemployment

Working part-time when one wants full-time work or holding a job that underutilizes skills.

Inflation Rate

The percentage increase in the overall price level (e.g., CPI) from one period to the next.

Cost-of-Living Adjustment (COLA)

A wage clause that automatically raises pay in line with inflation, protecting employees’ purchasing power.

Price Index

A measure that compares the current price level to the price level in a base year (set at 100).

Consumer Price Index (CPI)

Index that tracks changes in the cost of a typical household’s market basket of goods and services.

Producer Price Index (PPI)

Index that measures price changes for a basket of goods produced by typical manufacturers.

Quality/New-Good Bias

The tendency of a fixed basket CPI to overstate inflation by not fully accounting for quality improvements or substitutions; reduced by allowing product substitution.

Value of Money

The purchasing power of a unit of currency; it falls when the CPI rises (more money needed for the same goods).

Unilateral Transfer

A one-way transfer of funds with no good or service exchanged in return (e.g., foreign aid, remittances).

Net Transfers

The difference between transfers received from and sent to foreigners in the balance-of-payments accounts.

Current Account

Balance-of-payments account that records trade in goods & services, income flows, and net transfers.

Balance of Trade

Exports minus imports of goods and services within the current account.

Trade Deficit

When a country’s imports exceed its exports (negative balance of trade).

Financial Outflow

Domestic funds used to purchase foreign assets, representing money leaving the country in the financial account.

Comparative Advantage

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

Say’s Law

Principle that supply creates its own demand; production generates equivalent income and demand.

Aggregate Demand (AD)

The total planned spending on domestic goods and services at various price levels.

Aggregate Supply (AS)

The relationship between the overall price level and the amount of real GDP firms are willing to produce.

Long-Run Aggregate Supply (LRAS)

Vertical line at potential GDP, indicating output is independent of the price level in the long run.

Potential GDP

The level of output an economy can produce when operating at full employment of labor and capital.

Sticky Prices and Wages

The Keynesian idea that prices and wages adjust slowly, preventing quick return to full employment.

Multiplier

Ratio showing how a change in autonomous spending leads to a larger change in equilibrium output (e.g., multiplier of 3 means $250 spending raises output by $750).

Phillips Curve

Curve showing the short-run inverse relationship between inflation and unemployment.

Classical Economics

School emphasizing flexible prices and self-correcting markets; sees output determined by supply in the long run.

Neoclassical Economics

Focuses on the long-run determinants of output and employment; stresses price flexibility and low inflation.

Keynesian Economics

Highlights short-run fluctuations driven by changes in aggregate demand and assumes sticky prices/wages.

M1 Money Supply

Narrow definition of money consisting of currency in circulation plus checkable (demand) deposits.

Medium of Exchange

Function of money that allows it to be used to purchase goods and services.

Store of Value

Function of money that allows purchasing power to be saved for future use.

Required Reserve Ratio

Percentage of deposits banks must hold in reserve (e.g., 10% if $100 deposit supports $1,000 expansion).

Money Multiplier

Maximum multiple by which deposits can expand given the reserve ratio (1 / required reserve ratio).

Checkable Deposits

Bank deposits that can be withdrawn by writing checks; major component of M1.

Bank Assets

Resources owned by a bank (loans, reserves); decrease alongside liabilities when withdrawals occur.

Bank Liabilities

Obligations of a bank, primarily customer deposits.

Deposit Creation

Process by which banks lend out excess reserves, expanding the money supply.