Macroeconomic Principles

These flashcards cover key concepts related to aggregate demand and supply, policy responses, and economic fluctuations.

AD curve

Aggregate Demand curve, which shows the relationship between the overall price level and the total quantity of goods and services demanded.

Wealth effect

The tendency for people to spend more when they perceive themselves as wealthier.

Full causal chain (price level increases)

Price level rises → Real purchasing power falls → Consumption decreases → Aggregate expenditures fall → Equilibrium real GDP falls.

Demand shock

An event that shifts the AD curve, impacting demand for goods and services.

Supply shock

An event that shifts the AS curve, affecting the supply of goods and services.

Expansionary fiscal policy

Government policy that increases spending or decreases taxes to increase AD.

Contractionary monetary policy

Policy that lowers the money supply or increases interest rates to decrease AD.

Movement along AD curve

A response to changes in the price level affecting the quantity of goods demanded.

Shift of AD curve

A change in aggregate demand due to factors other than the price level, such as consumer confidence or government policy.

Sticky wages

Wages that are slow to adjust to changing economic conditions, often keeping above market equilibrium.

Short-run aggregate supply (SRAS) curve

Curve that shows the positive relationship between price level and output in the short run.

Long-run aggregate supply (LRAS) curve

Vertical curve that represents the relationship between the price level and output when the economy is at full employment.

Recessionary gap

A situation where actual GDP is less than potential GDP, leading to unemployment.

Price stability

The avoidance of significant swings in the inflation rate over time.

Automatic stabilizers

Economic policies and programs that automatically help stabilize an economy, such as unemployment insurance.

Marginal propensity to consume (MPC)

The portion of additional income that an individual spends on consumption rather than saving.

Multiplier effect

The proportional amount of increase in final income that results from an injection of spending.

Investment

Expenditures on capital goods that will be used for future production.

Consumption

Total spending by households on goods and services.

Net exports

The value of a country's total exports minus the value of its total imports.

Inflation

A general increase in prices and fall in the purchasing value of money.

Unemployment

The situation when individuals who are capable of working are unable to find a job.

Policy dilemma

A situation wherein policymakers face conflicting commitments, such as stabilizing inflation and maintaining high employment.

Liquidity

The availability of liquid assets to a market or company.

M1

A category of the money supply that includes cash and checking deposits.

M2

A broader classification of money, including M1 plus savings accounts, time deposits, and other near-money.

Required reserves

The minimum amount of reserves a bank must hold against deposits.

Excess reserves

Any amount of reserves held by a bank above the required amount.

Federal Reserve System

The central banking system of the United States, responsible for implementing monetary policy.

FOMC

Federal Open Market Committee; the branch of the Federal Reserve that determines the direction of monetary policy.

Interest on Reserve Balances (IORB)

The interest rate paid by the Federal Reserve on excess reserves held by banks.

Crowding out effect

A decrease in investment due to an increase in government spending.

Fiscal policy

Government policy that uses taxation and spending to influence the economy.

Monetary policy

Policy that manages the money supply and interest rates.

Short run vs Long run

The short run is a period where some factors are fixed, while in the long run, all factors can change.

Aggregate expenditures

Total amount spent in the economy at various price levels.

Interest rates

The cost of borrowing money, expressed as a percentage.

Potential output

The maximum level of output an economy can sustain over the long term without increasing inflation.

Technological change

Improvements in technology that can increase productivity and shift aggregate supply.

Stagflation

The economic condition of simultaneous stagnant economic growth, high unemployment, and high inflation.

Government spending

Expenditures made by the government to acquire goods and services for the economy.

Consumer confidence

An economic indicator that measures how optimistic consumers feel about their financial situations.

Equilibrium price level

The price level at which quantity of aggregate demand equals quantity of aggregate supply.

Factors affecting AS

Inputs that can lead to shifts in the aggregate supply curve, such as production costs or technology.

Adjustment process

How the economy responds to changes or shocks over time to return to long-term equilibrium.

Negative supply shock

An unexpected event that increases costs or reduces the supply of goods and services.

GDP decrease

A reduction in the overall output produced within an economy.

Assets vs Liabilities

Assets are owned resources, while liabilities are obligations owed to others.

Long run flexibility

In the long run, wages and prices can all adjust to equilibrium.

Crisis stabilization policies

Emergency measures taken to stabilize the financial system during periods of crisis.

Vertical money supply curve

A graph showing the money supply, which is fixed by the central bank and does not depend on the interest rate.

Sustainable economic growth

Economic growth that can occur without creating significant imbalances.