Macroeconomics: Foundations and the Business Cycle

Comprehensive practice flashcards covering macroeconomics definitions, theories, models, and indicators from the provided lecture notes.

Macroeconomics

A branch of economics that focuses on large-scale economies such as national income, unemployment rates, inflation, economic growth, and the overall price level.

Microeconomics

A branch of economics that focuses on supply and demand, consumer behaviors, and production theory.

Classical Economics

The existing economic theory prior to Keynes that was unable to explain the causes of the severe worldwide economic collapse or provide policy solutions to shift the economy back to full employment.

John Maynard Keynes

A British economist who overturned the idea that free markets would automatically prevent economies from deviating from full employment.

Simon Kuznets

The economist who developed a technique to measure the value of national income and production across the entire economy, leading to the development of the concept of GDP.

GDP

The value calculated as $\text{price} \times \text{quantity}$ of final goods and services produced in a country over a specific period.

Fiscal Policy

Also known as Budgetary Policy; it involves the use of government spending ($G$) and taxation ($T$) to influence the level of economic activity.

Monetary Policy

Refers to the actions of the Reserve Bank in setting interest rates ($I/r$) in order to influence the level of economic activity and inflation.

Aggregate Expenditure (AE) Model

The foundation model that explains how changes in expenditure affect the level of income and output.

Aggregate Demand/Aggregate Supply (AD/AS) Model

A model of the macroeconomy used to explain fluctuations in both output and the price level.

Potential GDP

The maximum or full employment level of production that can be attained given the economy’s factors of production and the level of technology.

Positive Output Gap

A situation where actual GDP is above the trend line, meaning the unemployment rate has fallen below the natural rate.

Negative Output Gap

A situation where actual real GDP is below the trend line, meaning the unemployment rate has risen above the natural rate.

Technical Recession

Defined as two or more successive quarters of negative economic growth.

Cyclical Unemployment

A type of unemployment that occurs when there is insufficient aggregate demand for goods and services to create enough jobs.

Productive Capacity

The maximum possible output that an economy can produce.

Foreign Investment

The cross-border movement of finance caused by borrowing and the sale of assets, recorded in the financial account of the Balance of Payments (BOP).

NAIRU

The Non-Accelerating Inflation Rate of Unemployment; the minimum rate of unemployment that the economy can sustain without causing inflation to accelerate.

Leading Indicators

Economic variables that increase before the level of economic activity actually increases, such as share prices and building approvals.

Coincident Indicators

Economic variables that change simultaneously with economic conditions, such as factory production and retail sales.

Lagging Indicators

Economic variables that change after the economy has already shifted, such as interest rates, the unemployment rate, and the inflation rate.

Autonomous Consumption

The minimum level of spending that occurs regardless of income, representing fixed expenses for households even if disposable income ($Y$) is zero.

Marginal Propensity to Consume (MPC)

The proportion of additional income that a household will spend, calculated as $\frac{\text{Change in Consumption}}{\text{Change in Income}}$.

Marginal Propensity to Save (MPS)

The proportion of additional income that households will save, where $\text{MPC} + \text{MPS} = 1$.

Real Interest Rate

The true cost of borrowed funds, calculated as $\text{Nominal } I/r - \text{inflation rate}$.

The Multiplier

The proportion by which income will rise following an initial change in autonomous spending, calculated as $k = \frac{1}{1 - \text{MPC}}$ or $k = \frac{1}{\text{MPS}}$.

Economic Hardship Index

An indicator where a rise suggests increased economic discomfort for the average person due to higher cost of living and joblessness.

Countercyclical Variables

Economic variables that move in the opposite direction of real GDP, such as unemployment and government welfare spending.

Procyclical Variables

Economic variables that move in the same direction as real GDP, such as consumer spending, investment, and employment.