Macroeconomics Review

Practice vocabulary flashcards covering economic growth, inflation, banking, financial markets, aggregate demand and supply, monetary and fiscal policy, and international trade.

Productivity

The output produced per worker.

Capital Accumulation

The process of increasing the amount of capital, such as machines, tools, factories, and equipment.

Technological Progress

Improvements in production technology and the key to sustained long-run economic growth.

Diminishing Returns

The principle that each additional unit of an input eventually adds less additional output.

Catch-Up Growth

The process by which poor countries can grow rapidly by accumulating capital.

Steady State

The point in the Solow model where investment equals depreciation ($\text{Investment} = \text{Depreciation}$).

Nonrival

A characteristic of an idea or technology where one person's use does not prevent another person's use.

Nonexcludable

A characteristic of a good or idea where it is difficult to stop others from using it.

Institutions

The rules and systems that shape economic activity by creating incentives for investment and innovation.

Inflation

A generalized rise in the overall level of prices in an economy over time.

Purchasing Power

The amount of goods and services that your money can buy.

Relative Price Change

A change in one item's price compared with other items, distinct from generalized inflation across the whole economy.

Consumer Price Index (CPI)

An index that tracks the average prices consumers pay over time for a representative basket of goods and services, commonly used for cost-of-living adjustments.

Personal Consumption Expenditure (PCE) Deflator

An inflation measure that uses a continually updated basket of consumer goods and services to track spending patterns and guide Federal Reserve monetary policy toward its $2\%$ target.

Core Inflation

A measure of inflation that excludes volatile food and energy prices to identify underlying inflation trends.

Producer Price Index (PPI)

An index that measures the prices of inputs into the production process to track business production costs.

GDP Deflator

A price index measuring changes in the prices of domestically produced goods and services, calculated as $\frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100$.

Money Illusion

The mistaken tendency to focus on nominal dollar amounts instead of adjusting for inflation.

Nominal Wage Rigidity

The tendency for employers to avoid cutting workers' wages in dollar terms, even when the economy is struggling.

Hyperinflation

Extremely rapid inflation that makes money unreliable and weakens its core functions.

Menu Costs

The costs to businesses of changing and updating stated prices.

Shoe-Leather Costs

The time and effort spent managing money and making frequent bank trips during inflation to avoid holding cash that loses value.

Inflation Fallacy

The mistaken belief that higher prices automatically mean lower purchasing power, ignoring that nominal incomes may rise as well.

Maturity Transformation

The banking practice of using short-term deposits withdrawable on demand to finance long-term loans repaid over many years.

Bank Run

A situation where unusually large numbers of customers attempt to withdraw their deposits simultaneously, exceeding immediately available cash.

Fire Sale

A rapid sale of assets, often at reduced prices, because the seller urgently needs cash.

Shadow Banks

Financial institutions that perform bank-like functions without operating under traditional banking regulations and deposit insurance.

Contagion

The spread of financial trouble, falling asset prices, and uncertainty from one financial institution to others.

Default Risk

The risk that a bond issuer fails to repay the principal or interest payments as promised.

Term Risk

The risk associated with uncertainty about future interest rates over the life of a bond.

Liquidity Risk

The risk of being unable to quickly sell an asset at a reasonable price without a significant loss in value.

Fundamental Value

The present value of expected future profits of an asset.

Efficient Markets Hypothesis

The theory that asset prices fully reflect all publicly available information.

Speculative Bubble

A condition in which asset prices rise far above their fundamental value due to speculation.

Greater Fool Theory

The idea of buying an overpriced asset expecting someone else will pay an even higher price for it later.

Business Cycle

Short-run fluctuations in overall economic activity consisting of expansions, peaks, recessions (contractions), and troughs.

Potential Output

The level of output an economy can sustainably produce when its resources are fully employed.

Output Gap

The percentage difference between actual output and potential output, calculated as $\frac{\text{Actual GDP} - \text{Potential GDP}}{\text{Potential GDP}} \times 100$.

Okun's Rule of Thumb

The relationship stating that for every percentage point actual output falls below potential output, the unemployment rate tends to rise by approximately $0.5$ percentage points.

Equilibrium Unemployment

The non-zero unemployment rate associated with an economy producing at its potential output.

Four-Week Moving Average

A calculation that smooths out weekly fluctuations in volatile data series, calculated as $\frac{\text{Sum of the past 4 weekly observations}}{4}$.

Aggregate Demand (AD)

The total planned purchases of final goods and services across the economy at different price levels.

Aggregate Supply (AS)

The total planned production of goods and services businesses are willing and able to produce and sell across the economy.

Aggregate Expenditure (AE)

Total planned spending on goods and services, expressed as $AE = C + I + G + NX$.

Stagflation

An economic condition characterized by stagnant or falling output combined with rising prices.

Multiplier Effect

The ripple effect whereby an initial spending change produces a larger overall change in GDP, calculated as $\text{Change in GDP} = \text{Multiplier} \times \text{Initial spending change}$.

Classical Dichotomy

The macroeconomic idea that real economic variables can be analyzed separately from nominal variables in the long run.

Dual Mandate

The Federal Reserve's primary policy objectives of achieving maximum employment and stable prices.

Neutral Real Interest Rate

The real interest rate consistent with the economy producing at its potential output.

Federal Funds Rate

The interest rate on overnight loans of reserves between banks and certain other financial institutions.

Quantitative Easing (QE)

A monetary policy tool where the Fed purchases long-term bonds and securities to lower long-term interest rates.

Moral Hazard

The tendency of people or institutions to take greater risks because they expect someone else to help cover the losses.

Mandatory Spending

Government spending required by existing laws, such as Social Security and Medicare, which does not require annual congressional approval.

Discretionary Spending

Government spending that Congress must approve annually, making up about $30\%$ of federal spending.

Progressive Tax

A tax structure in which high-income earners pay a larger percentage of their income in taxes than lower-income earners.

Regressive Tax

A tax structure in which lower-income households pay a larger share of their income in taxes than higher-income households.

Crowding Out

A reduction in private investment caused by higher real interest rates resulting from expansionary fiscal policy.

Automatic Stabilizer

A government tax or spending program that automatically adjusts with the business cycle without requiring new legislative action.

Comparative Advantage

The ability of an individual or nation to produce a good or service at a lower opportunity cost than competitors.

Dumping

The practice of selling goods in a foreign market at extremely low prices to eliminate competition.

Tariff

A tax placed on imported goods that increases domestic prices and reduces the quantity of imports.

Foreign Direct Investment (FDI)

An international investment in which foreign individuals or entities invest directly in physical businesses or assets in another country.

Portfolio Investment

An international financial flow where foreign investors purchase foreign stocks and bonds without direct control over physical assets.

Currency Appreciation

An increase in the value of a currency, making imports cheaper for domestic buyers and exports more expensive for foreign buyers.

Currency Depreciation

A decrease in the value of a currency, making exports cheaper and more competitive while making imports more expensive.

Floating Exchange Rate

An exchange rate system where currency values are determined entirely by the supply and demand in foreign exchange markets.