Unit 3: Macroeconomics Flashcards
Absolute poverty
People living below the minimum income necessary to satisfy basic physical needs (food, clothing, and shelter); as of October 2015, the World Bank international poverty line is set at US$1.90 PPP per day.
Aggregate demand (AD)
Planned spending on domestic goods and services at different average price levels, per period of time. Consists of consumption, investment and government expenditures plus net exports.
Aggregate demand curve
A curve showing the planned level of spending on domestic output at different average price levels.
Aggregate supply (AS)
The planned level of output domestic firms are willing and able to offer at different average price levels.
Aggregate supply curve
A curve showing the planned level of output that domestic firms are willing and able to offer at different average price levels.
Business confidence
A measure of the degree of optimism that businesses have about the economic future.
Business cycle
The short-term fluctuations of real GDP around its long-term trend (or potential output).
Business tax
Tax levied on the income of a business or corporation.
Capital gains tax
A tax on the profits realized from the sale of financial assets such as stocks or bonds.
Central bank
An institution charged with conducting monetary and exchange rate policy, regulating behaviour of commercial banks, and providing banking services to the government and commercial banks.
Consumer confidence
A measure of the degree of optimism that households have about their income and economic prospects.
Consumer price index (CPI)
The average of the prices of the goods and services that the typical consumer buys expressed as an index number. The CPI is used as a measure of the cost of living in a country and to calculate inflation.
Consumption (C)
Spending by households on durable and non-durable goods and on services over a period of time.
Contractionary fiscal policy
Refers to a decrease in government expenditures and/or an increase in taxes that aim at decreasing aggregate demand and thus reducing inflationary pressures.
Contractionary monetary policy
A policy employed by the central bank involving an increase in interest rates and aimed at decreasing aggregate demand and thus inflationary pressures. Referred to also as tight monetary policy.
Corporate indebtedness
The sum of what a corporation owes to banks or other holders of its debt.
Cost-push inflation
Inflation that is a result of increased production costs (typically because of rising money wages or rising commodity prices) and illustrated by a leftward shift of the SRAS curve.
Cyclical (demand-deficient) unemployment
Unemployment that is a result of a decrease in aggregate demand and thus of economic activity; it occurs in a recession.
Deflation
A sustained decrease in the average price level of a country.
Deflationary/recessionary gap
Arises when the equilibrium level of real output is less than potential output as a result of a decrease in AD.
Demand management
Policies that aim at manipulating aggregate demand through changes in interest rates (monetary policy) or changes in government expenditures and taxation in order to influence growth, employment and inflation.
Demand-pull inflation
Inflation that is caused by increases in aggregate demand.
Demand side policies
Refers to economic policies that aim at affecting aggregate demand and thus macroeconomic variables such as growth, inflation and employment; demand side policies include fiscal policy and monetary policy.
Direct taxes
Taxes on income, profits or wealth paid directly to the government.
Discount rate
The interest rate that a central bank charges commercial banks for short-term loans (also referred to as the refinancing rate).
Disinflation
When the average price level continues to rise but at a slower rate so that the rate of inflation is positive but lower.
Economic growth
Refers to increases in real GDP over time.
Expansionary fiscal policy
Refers to an increase in government expenditures and/or a decrease in taxes that aim at increasing aggregate demand and thus real output and employment.
Expansionary monetary policy
Monetary policy aiming at increasing aggregate demand through a decrease in interest rates; also referred to as easy monetary policy.
Expenditure approach
One of three analytically equivalent approaches of measuring GDP that adds all the expenditures made on final domestic goods and services over a period of time by households, firms, the government and foreigners.
Fiscal policy
A demand-side policy using changes in government spending and/or direct taxation to influence aggregate demand and thus growth, employment and prices.
Frictional unemployment
Unemployment of individuals who are in-between jobs, as people quit to find a better job or to move to a different location.
Full employment
A goal of macroeconomic policy that aims at fully utilizing the scarce factor of production labour. Full employment exists when the economy is producing at its potential level of real output and thus there is only natural unemployment (the AD–AS model considers the AD and AS curves together). In the production possibilities curve (PPC model), full employment exists when the economy is producing on the PPC.
Full employment level of output
The level of output that is produced by the economy when there is only natural unemployment.
Gini coefficient
A measure of the degree of income inequality of a country that ranges from zero (perfect income equality) to one (perfect inequality). Diagrammatically it is the ratio of the area between the Lorenz curve and the diagonal over the area of the half-square.
Government spending (G)
Refers to all spending by the government that is distinguished into current expenditures, capital expenditures and transfer payments.
Gross domestic product
(GDP) The value of all final goods and services produced within an economy over a period of time, usually a year or a quarter.
Gross national income
(GNI) The income earned by all national factors of production independently of where they are located over a period of time; it is equal to GDP plus factor income earned abroad minus factor income paid abroad.
Happiness Index
An index that is used to measure economic well-being of a population using several quality of life dimensions.
Happy Planet Index
An index that combines four elements to show how efficiently residents of different countries are using environmental resources to lead long, happy lives. The elements are well-being, life expectancy, inequality of outcomes and ecological footprint.
Household indebtedness
The money that households owe.
Households
Groups of individuals in the economy who share the same living accommodation, who pool their income and jointly decide the set of goods and services to consume.
Incentive-related policies
Policies that aim at improving economic incentives of individuals and firms.
Income approach
One of the three equivalent ways that GDP can be measured, by adding all the incomes generated in the production process (wages, profits, interest and rent) for a given time period.
Industrial policies
A type of interventionist supply-side policies whereby the government chooses to support specific industries through preferential tax cuts, subsidies, subsidized loans and other means as they are considered pivotal in the growth prospects of the economy.
Inflation
A sustained increase in the average level of prices.
Inflationary gap
The case where equilibrium real output exceeds potential output as a result of an increase in AD.
Inflation rate
The percentage change between two periods of the average price level, usually measured through the CPI.
Informal economy
Refers to the part of an economy where activity is not officially recorded, regulated or taxed. The activities of the informal economy are not included in a country’s national income figures.
Infrastructure
Physical capital typically financed by governments that is essential for economic activity to take place, including roads, power, telecommunications and sanitation, generating significant positive externalities.
Interest rate
The cost of borrowing money or the reward for saving money over a period of time expressed as a percentage.
Interventionist supply side policies
A set of policies that aim to increase an economy’s productive capacity that relies on a greater role for the government; these include expenditures on infrastructure, education, health care, research and development, and all industrial policies.
Investment (I)
Spending by firms on capital goods such as machines, tools, equipment and factories.
Keynesian aggregate supply curve
An aggregate supply curve that shows the level of real output produced in an economy in relation to the price level. It consists of three sections: a horizontal section, an upward-sloping section and a vertical section. Changes in real GDP or the price level depend on aggregate demand and how close to capacity the economy is operating.
Labour market flexibility
The labour market is considered flexible if it can adjust fast and fully to changes in labour demand and labour supply conditions.
Labour union
An organization of workers whose goals include improving working conditions and achieving higher compensation for members. Unions permit workers to negotiate more effectively with employers.
Long-run aggregate supply (LRAS)
Aggregate supply that is dependent upon the resources and technology in the economy, thus being independent of the price level. It is vertical at the level of potential output. It can only be increased by improvements in the quantity and/or quality of factors of production as well as improved technology.
Long run (macroeconomics)
The period of time when the prices of all factors of production, especially wages, change to match changes in the price level.
Long-term growth
Growth over long periods of time. In the PPC model this is shown by outward shifts of the PPC. When shown in the AD–AS model (the AD–AS model considers the AD and AS curves together), it is shown by rightward shifts in the LRAS curve.
Long-term growth trend
Refers to average growth over long periods of time shown in the business cycle diagram as the line that runs through short-term fluctuations, indicating changes in potential output.
Lorenz curve
A curve showing what percentage of the population owns what percentage of the total income or wealth in the economy. It is calculated in cumulative terms. The further the curve is from the line of absolute equality (along the diagonal), the more unequal the distribution of income.
Market-based supply side policies
A set of policies based on well-functioning competitive markets in order to promote long-term economic growth, shown by increases in long-run aggregate supply.
Market-oriented approaches
Approaches or policies that are based on the actions of private decision-makers operating in markets with a minimum amount of government intervention.
Minimum income standards
A measure of poverty that is based on the beliefs of people regarding what is essential in order to achieve a minimum acceptable standard of living.
Monetary policy
A demand-side policy using changes in the money supply or interest rates to achieve economic objectives relating to output, employment and inflation.
Money
Anything that is generally accepted as a means of payment for goods and services. It usually consists of currency and checking accounts.
Money creation
The process of creating new money by commercial banks, which occurs when they make loans.
Money supply
The total amount of money available at a particular time, consisting of currency plus checking accounts.
National income
The income earned by the factors of production of an economy, equal to wages plus interest, plus rents, plus profits.
National income accounting
The services provided by a statistical entity in every country that measure the economy’s national income and output as well as other economic activity.
National income statistics
The statistical data used to measure a nation’s income and output, and perform national income accounting.
Natural rate of unemployment
The rate of unemployment that occurs when the economy is producing at its potential output or full employment level of output. It is equal to the sum of structural, frictional and seasonal unemployment.
Net exports (X - M)
Export revenues minus import expenditure.
Nominal gross domestic product
The total money value of all final goods and services produced in an economy in a given time period, usually one year, at current values (not adjusted for inflation).
Nominal gross national income
The total income earned by all the residents of a country (regardless of where their factors of production are located) in a given time period, usually a year, at current prices (not adjusted for inflation).
Nominal interest rates
Interest rates that have not been adjusted for inflation.
OECD Better Life Index
An index to compare well-being across countries, based on several dimensions that the OECD has identified as essential, in the areas of material living conditions and quality of life.
Open market operations
A tool of monetary policy involving the buying or selling of (short-term) government bonds by the central bank in order to increase or decrease the money supply, thus influencing the rate of interest.
Output approach
One of the three equivalent ways that GDP can be measured, it adds up the value of final goods and services produced in a given time period.
Per capita
Per person. Per capita values are found by dividing the variable by the size of the population.
Personal income taxes
Taxes paid by individuals or households on their incomes, regardless of the source of the income, such as wages, salaries, interest income or dividends.
Poverty
Arises when the lack of material possessions or money prevent an individual or a family from achieving a minimum satisfactory standard of living.
Poverty line
A level of income determined by a government or international body (such as the World Bank) that is just enough to ensure a family can satisfy minimum needs in terms of food, clothing and housing.
Price deflator
A price index that removes the impact of changes in the price level when measuring nominal economic variables.
Progressive taxation
Taxation where the fraction of tax paid increases as income increases. The average tax rate increases.
Proportional tax
A system of taxation where tax is levied at a constant rate as income rises.
Real GDP
The total value of all final goods and services produced in an economy in a given time period, usually one year, adjusted for inflation.
Real GDP per person (per capita)
Real GDP divided by the population of the country.
Real GNI per person (per capita)
Real GNI divided by the population of the country.
Real interest rates
Interest rates that have been adjusted for inflation.
Recession
Occurs when real GDP falls for at least two consecutive quarters.
Regressive taxation
Taxation where the fraction of tax paid decreases as income increases. The average tax rate decreases. All indirect taxes are regressive.
Relative poverty
A comparative measure of poverty according to which income levels do not allow people to reach a standard of living that is typical of the society in which they live. It is defined as a percentage of society’s median income.
Seasonal unemployment
Unemployment that arises when people are out of work because their usual job is out of season, for example, agricultural workers during winter months.
Short-run aggregate supply (SRAS)
The total quantity of real output (real GDP) offered at different possible price levels in the short run (when wages and other resource prices are constant).
Short run (macroeconomics)
The period of time when the prices of factors of production, especially wages, are considered fixed.
Short-run Phillips curve
A curve showing the inverse relationship between the rate of unemployment and the rate of inflation, which suggests a trade-off between inflation and unemployment.
Short-term fluctuations of economic activity
Periods of growth of real GDP followed by periods of contraction, which are part of the business cycle.
Structural unemployment
A kind of long-term unemployment that arises from a number of factors including: technological change; changes in the patterns of demand for different labour skills; changes in the geographical location of industries; labour market rigidities.
Supply-side policies
Government policies designed to shift the long-run aggregate supply curve to the right, thus increasing potential output in the economy and achieving economic growth.
Sustainable debt
Refers to a level of government debt such that the borrowing government can make its payments of interest and debt repayment while at the same being able to meet the economy’s growth objectives.
Transfer payments
Payments made by the government to vulnerable groups in a society, including older people, low income people, unemployed and many more. The objective is to transfer money from taxpayers to those who cannot work, to prevent them from falling into poverty.
Unemployment
When a person (who is above a specified age and is available to work) is actively looking for work, but is without a job.
Unemployment benefits
Payments, usually made by the government, to people who are unemployed (and actively seeking employment).
Unemployment rate
The number of unemployed workers expressed as a percentage of the total workforce.
Universal basic income
A regular cash payment given to all persons in an economy that is independent of any other source of income they may have. It is intended to reduce poverty and income inequality.
Wage
Payment received by the factor of production labour, which is a certain amount per unit of time.
Wealth
The total value of all assets owned by a person, firm, community, or country minus what is owed to banks or other financial institutions
Weighted price index
A measure of average prices over a period of time that gives a weight to each item according to its relative importance in the consumers’ budgets. It is used to measure changes in the price level.
