Macroeconomics Test Study Guide: Output, Inflation, Unemployment, and Economic Policies

Comprehensive vocabulary flashcards covering macroeconomics fundamentals: GDP, inflation, unemployment, business cycles, tax structures, and tools of fiscal and monetary policy.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within an economy over a specific period of time.

GDP Expenditure Formula

The equation used to calculate economic output: $GDP = C + I + G + (X - M)$, where $C$ is consumer spending, $I$ is gross business investment, $G$ is government purchases, and $(X - M)$ is net exports.

Consumer Spending (Consumption)

The largest component category of Gross Domestic Product, representing private expenditures by households on goods and services.

Nominal GDP

Gross domestic product evaluated at current market prices without adjusting for the effects of inflation.

Real GDP

Gross domestic product adjusted for price changes and inflation, reflecting the true volume of national output using constant base-year prices.

Inflation

A general and sustained increase in the overall price level of goods and services across an economy over time.

Consumer Price Index (CPI)

An economic metric that tracks the average change over time in prices paid by urban consumers for a standardized market basket of goods and services, used to measure inflation.

Borrowers (in Inflation)

The economic group helped by unanticipated inflation because they repay fixed-rate debts with money that has less purchasing power than when it was borrowed.

Fixed-Income Earners and Lenders (in Inflation)

The economic groups hurt by inflation because the real purchasing power of fixed payments declines, and lenders receive repayments worth less than anticipated.

Stagflation

A severe economic condition characterized by stagnant economic growth, high unemployment, and high inflation occurring simultaneously.

Unemployment

The condition of individuals who are part of the labor force, actively seeking work, able and willing to work, but currently without a job.

Unemployment Rate Equation

The mathematical formula: $\text{Unemployment Rate} = \left(\frac{\text{Number of Unemployed}}{\text{Labor Force}}\right) \times 100$.

Structural Unemployment

Joblessness caused by fundamental shifts in the economy, technological advancements, or changes in industry demand that create a mismatch between workers' skills and available jobs.

Frictional Unemployment

Voluntary or temporary joblessness that occurs when workers are in the process of transitioning between jobs, searching for new positions, or first entering the workforce.

Cyclical Unemployment

Joblessness directly related to macroeconomic downturns and contractions in the business cycle, occurring when aggregate demand declines.

Business Cycle

The alternating periods of expansion and contraction in overall economic activity over time, composed of peaks, troughs, recessions, and expansions.

Peak

The highest point of the business cycle, representing maximum economic output (GDP) and the lowest level of unemployment before a contraction begins.

Trough

The lowest turning point of the business cycle, where real GDP reaches its minimum and unemployment peaks before a recovery starts.

Recession

A widespread, significant decline in economic activity lasting more than a few months, marked by decreasing GDP and rising unemployment.

Depression

An exceptionally prolonged and severe economic downturn characterized by sustained, steep declines in real GDP, extreme unemployment, and widespread business failures.

Government Deficit

The shortfall that occurs in a single fiscal year when the government's total expenditures exceed its total tax revenues.

National Debt

The cumulative total of all past annual budget deficits minus budget surpluses, representing the total amount of money owed by the federal government.

Federal Reserve System

The central banking system of the United States, commonly called 'the Fed,' responsible for formulating monetary policy, supervising banks, and maintaining financial stability.

Monetary Policy

Central bank actions that manipulate the money supply, administered interest rates, and credit conditions to achieve price stability and maximum sustainable employment.

Board of Governors

The seven-member governing agency of the Federal Reserve System that directs the central bank's operations, oversees regional Reserve Banks, and contributes to monetary policy decisions.

Federal Open Market Committee (FOMC)

The primary monetary policymaking branch of the Federal Reserve System, consisting of the Board of Governors and regional Bank presidents, responsible for directing open market operations.

Open Market Operations

The Federal Reserve's practice of buying and selling government securities in the financial markets to adjust commercial bank reserves and regulate the nation's money supply.

Reserve Requirement

The regulatory rule specifying the minimum percentage of deposits that depository institutions must maintain in vault cash or on deposit with the central bank.

Discount Rate

The interest rate charged by the Federal Reserve to eligible commercial banks when borrowing short-term funds directly from the Fed's discount window.

Fiscal Policy

The use of federal government taxation, transfer payments, and public spending by Congress and the President to influence economic growth and stability.

Progressive Tax

A tax system where higher-income earners pay a higher percentage of their income in taxes than lower-income earners (e.g., the federal individual income tax).

Regressive Tax

A tax system where the tax takes a larger percentage of total income from low-income earners than from high-income earners (e.g., general retail sales taxes).

Proportional Tax

A tax structure in which all taxpayers pay the same fixed percentage of their income, regardless of earnings (often referred to as a flat tax).

Expansionary Fiscal Policy

Legislative action involving tax cuts or increases in government spending/grants designed to stimulate aggregate demand, reduce unemployment, and lift the economy out of a recession.

Contractionary Fiscal Policy

Legislative action involving tax increases or cuts in government spending designed to reduce aggregate demand and cool down an overheating, inflationary economy.

Expansionary Monetary Policy

Central bank actions—such as lowering interest on reserve balances, reducing administered rates, or purchasing securities—that increase bank liquidity and lower borrowing costs to stimulate economic growth.

Contractionary Monetary Policy

Central bank actions—such as raising interest rates on reserve balances or raising administered borrowing costs—that tighten credit and reduce the money supply to curb inflation.