Macroeconomics Vocabulary Flashcards

125 flashcards covering key vocabulary terms and definitions from chapters 8 to 12 of Macroeconomics.

Labour Force

The total number of employed and unemployed individuals in the economy.

Unemployment Rate

The percentage of the labor force that is unemployed.

Labour Force Participation Rate

The percentage of the working-age population that is part of the labor force.

Frictional Unemployment

Normal job search and turnover resulting in temporary unemployment.

Structural Unemployment

Unemployment due to a mismatch between workers' skills and market needs.

Seasonal Unemployment

Unemployment that occurs as a result of seasonal changes in the demand for certain kinds of labor.

Cyclical Unemployment

Unemployment resulting from economic downturns or recessions.

Natural Rate of Unemployment

The sum of frictional, structural, and seasonal unemployment; it reflects full employment without cyclical unemployment.

Inflation

A persistent rise in the average price level in the economy, reducing purchasing power.

Consumer Price Index (CPI)

A measure that examines the weighted average of prices of a basket of consumer goods and services.

Inflation Rate

The percentage change in the Consumer Price Index (CPI) over a specified period.

Core Inflation

The inflation rate calculated excluding food and energy prices.

Nominal Interest Rate

The interest rate that is quoted, not adjusted for inflation.

Real Interest Rate

The nominal interest rate adjusted for inflation.

Quantity Theory of Money

A theory that relates the money supply (M) to price level (P), velocity of money (V), and real output (Q).

Phillips Curve

A graph depicting the inverse relationship between inflation and unemployment.

Aggregate Demand (AD)

The total demand for goods and services in the economy at a given overall price level and in a given time period.

Aggregate Supply (AS)

The total supply of goods and services that firms in an economy plan on selling during a specific time period.

Potential GDP

The maximum output an economy can produce without triggering inflation.

Demand Shocks

Unexpected events that increase or decrease demand for goods and services.

Supply Shocks

Unexpected events that affect the supply of goods and services in the economy.

Recessionary Gap

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

Inflationary Gap

A situation where actual GDP exceeds potential GDP, leading to rising prices.

Aggregate Expenditure (AE)

The total spending in the economy, comprised of consumption, investment, government spending, and net exports.

Multiplier Effect

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

Injections

Additions to the economy's circular flow of income, including investment (I), government spending (G), and exports (X).

Leakages

Withdrawals of spending from the economy's circular flow, including savings (S), taxes (T), and imports (IM).

Equilibrium

The condition where aggregate expenditure equals aggregate output (AE = Y).

Money Supply (M1+)

The total amount of monetary assets available in an economy at a specific time.

Monetary Policy

The actions of a central bank to regulate the money supply and interest rates to achieve macroeconomic objectives.

Overnight Rate

The interest rate at which banks lend money to each other overnight.

Transmission Mechanism

The process through which monetary policy decisions affect economic variables such as interest rates, exchange rates, and inflation.

Price Stability

A situation in which prices in an economy do not change significantly over time.

Full Employment

The state of labor market efficiency where all individuals willing and able to work at prevailing wage rates can find employment.

Fiscal Policy

Government adjustments to spending levels and tax rates to influence a nation's economy.

Exchange Rates

The value of one currency for the purpose of conversion to another.

Purchasing Power Parity (PPP)

An economic theory that compares different countries' currencies through a market 'basket of goods' approach.

Balance of Payments

A record of all economic transactions between residents of a country and the rest of the world.

Current Account

A national account that measures the import and export of goods and services plus net income and transfers.

Financial Account

A national account that measures investments across borders, including foreign assets and liabilities.

Fractional Reserve Banking

A banking system in which banks hold only a fraction of the deposits as reserves and use the rest to create loans.

Monetary Policy Tools

Instruments used by the central bank to implement monetary policy, including interest rates, reserve requirements, and open market operations.

Commodity Money

Money that has intrinsic value, such as gold or silver.

Fiat Money

Currency that has no intrinsic value but is established as money by government regulation.

Deposit Money

Money that is held in bank accounts and used for transactions.

Bank Rate

The interest rate at which a central bank lends money to commercial banks.

Demand for Currency

The total amount of a currency that buyers wish to purchase.

Supply of Currency

The total amount of a currency that sellers wish to sell.

Macroeconomic Performance

The overall performance of an economy, assessed through indicators like GDP, unemployment, and inflation.

Scarcity

The limited nature of society's resources.

Opportunity Cost

The cost of forgoing the next best alternative when making a decision.

Production Possibilities Frontier (PPF)

A curve that shows the maximum feasible amounts of two goods that can be produced with available resources.

Real GDP

Gross domestic product adjusted for inflation.

Nominal GDP

The total value of all goods and services produced in a country in a given year without adjustment for inflation.

Short-Run Aggregate Supply (SAS)

The aggregate supply curve that summarizes how the total output in an economy responds to changes in price levels in the short run.

Long-Run Aggregate Supply (LAS)

The aggregate supply curve that reflects the economy's output level when all inputs are used efficiently.

GDP Deflator

A measure of the level of prices of all new, domestically produced, final goods and services in an economy.

Stagflation

A situation of stagnant economic growth accompanied by inflation.

Loanable Funds Market

The market where borrowers and lenders come together to determine the interest rate and quantity of loans.

Interest Rate Parity

A theory that describes the relationship between interest rates and foreign exchange rates.

Capital Account

Part of the balance of payments that records all transactions made between entities in one country with the rest of the world.

Inflation Expectations

The rate at which people expect prices to rise in the future.

Negative Supply Shock

An unexpected event that decreases aggregate supply, leading to higher prices.

Positive Supply Shock

An unexpected event that increases aggregate supply, leading to lower prices.

Velocity of Money (V)

The rate at which money is exchanged in an economy.

Fiscal Multiplier

The ratio of change in national income to the change in government spending that causes it.

Cyclical Deficit

A deficit that occurs due to a downturn in the business cycle.

Structural Deficit

A deficit that exists even when the economy is operating at full capacity.

Output Gap

The difference between actual output and potential output.

Automatic Stabilizers

Economic policies and programs that counteract economic fluctuations without direct intervention.

Economic Growth

An increase in the production of goods and services in an economy over a period.

Demographic Changes

Changes over time in the structure of a population.

Investment Spending

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

Trade Balance

The difference between the value of a country's imports and its exports.

Net Exports (X - IM)

Exports minus imports.

Fixed Exchange Rate

A type of exchange rate regime where a currency's value is tied or pegged to another major currency.

Floating Exchange Rate

An exchange rate that is determined by the market forces of supply and demand.

Terms of Trade

The ratio at which one country's goods trade for those of another country.

Money Market

The sector of the financial market in which financial assets with high liquidity and short maturities are traded.

Liquidity

The ease with which an asset can be converted into cash without affecting its market price.

Central Bank

The national bank that provides financial and banking services for its country's government and commercial banking system.

Investment

The action or process of investing money for profit.

What is the formula for the Current Account in the Balance of Payments?

X − IM + net income/transfers.

What does the Financial Account include?

Investment in assets such as bonds and real estate.

What must balance in the Balance of Payments?

A surplus in one account equals a deficit in the other.

What is the Balance of Payments Identity?

CA + FA = 0.

What happens when the Canadian dollar (C$) increases?

It leads to a decrease in exports (X) and a contraction in aggregate demand (AD).

What effect does a decrease in the Canadian dollar (C$) have?

It results in an increase in exports (X) and an expansion in aggregate demand (AD).

Who supplies money in Canada?

Commercial banks supply money, though they are not legally required to hold cash reserves.

What trade-off do banks face regarding reserves?

They can achieve more profit by holding fewer reserves and issuing riskier loans but at a greater risk to deposits and customer trust.

What factors determine the money supply (M1+)?

The Bank of Canada and the quantity of loans and deposits created by banks.

What does the vertical money supply curve represent?

It illustrates the traditional view of a fixed money supply regardless of the interest rate.

What are the functions of money?

1. Medium of exchange 2. Unit of account 3. Store of value.

What is Commodity money?

Money that has intrinsic value, like gold.

What is Fiat money?

Government-issued money that has no intrinsic value.

What is Deposit money?

Bank deposits that are used for payments.

What is the measure for M1+?

Currency plus demand deposits.

What constitutes M2+?

M1+ plus other savings accounts.

How do banks create money?

Through fractional reserve banking, where they hold a fraction of deposits as reserves, and create new deposits through loans.

What is the effect of increasing the Overnight Rate (Policy Rate)?

It leads to decreased borrowing, a decrease in money supply, and economic contraction.