Unit 3: Macroeconomics: The Big Picture
Chpt. 6: Key Terms
Economic aggregates (p.142) – an economic measure that summarizes data across different
markets for goods, services, workers, and assets
Business cycle (p.144) – the short-run alternation between economic downturns, known as
recessions, and economic upturns, known as expansions
Depression (p.144) - a very deep and prolonged downturn
Recessions (p.144) - a period when aggregate output is below potential output
Expansions (p.144) - a period when output and employment are rising; also referred to as a
recovery
Employment (p.145) – the number of people currently employed for pay in the economy
Unemployment (p.145) – the number of people who are actively looking for work but aren’t
currently employed (unemployed under six months)
Labor force (p.145) - the number of people who are either actively employed for pay or
unemployed and actively looking for work; the sum of employment and
unemployment
Discouraged workers (p.145) - considered anyone who has been unemployed longer than 6
months; defined as - nonworking people who are capable of
working but have given up looking for a job because they believe
no jobs are available
Underemployment (p.146) - the number of people who work during a recession but receive
lower wages than they would during an expansion due to fewer
number of hours worked, lower-paying jobs, or both
Unemployment rate (p.146) – the percentage of the total number of people in the labor force
who are unemployed. It is calculated as: unemployment rate =
unemployment / (unemployment + employment
Aggregate output (p.146) – the economy’s total production of final goods and services for a
given time period, usually a year. Real GDP is the numerical
measure of aggregate output typically used by economists
Stabilization policy (p.148) – policy efforts undertaken to reduce the severity of recessions and
to rein in excessively strong expansions. There are two main
tools of stabilization policy: monetary policy and fiscal policy
Monetary policy (p.148) – a type of stabilization policy that involves changes in the quantity of
money in circulation or in the interest rate, or both
Fiscal policy (p.148) – a type of stabilization policy that involves the use of changes in taxation,
government transfers, or government purchases of goods and services
Secular long-run growth (p.149) – the sustained upward trend in aggregate output over several
decades; also referred to as long-run growth
Nominal (p.151) – refers to a measure or quantity that has not been adjusted for changes in
prices over time
Real (p.151) – refers to a measure or quantity that has been adjusted for changes in prices over
time
Aggregate price level (p.151) – the overall price level for final goods and services in the
economy
Inflation (p.151) - a rising aggregate price level
Deflation (p.151) – a failing aggregate price level
Price stability (p.152) – a low but positive rate of inflation targeted by most central banks
Inflation rate (p.152, 178) – the percent change per year in a price index – typically the
consumer price index. The inflation rate is positive when the aggregate
price level is raising (inflation) and negative when the aggregate price
level is falling (deflation)
Closed economy (p.153) – an economy that does not trade goods, services, or assets with other
countries
Open economy (p.154) – an economy that trades goods, services, and assets with other countries
Open-economy macroeconomics (p.154) – the study of those aspects of macroeconomics that
are affected by movements of goods, services, and
assets across national boundaries
Exchange rate (p.154) – the price of one currency in terms of another; determined by the
foreign exchange market. The nominal exchange rate is unadjusted for
international differences in price levels; the real exchange rate is
adjusted of those differences
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Trade balance (p.154) – the difference between the value of the goods and services a country
sells to other countries and the value of the goods and services it buys
from other countries
Capital flows (p.155) – international movement of financial assets
Chpt. 7: Key Terms
National income and product accounts (national accounts) (p.160) – an accounting of
consumer spending, sales of producers, business investment
spending, and other flows of money between different sectors of
the economy; also referred to as national accounts. Calculated
by the Bureau of economic Analysis
Consumer spending (p.160)
- household spending on goods and services produced by domestic
and foreign firms
Stock (p.161) - a share in the ownership of a company held by a shareholder
Bond (p.161) – a legal document issued by a corporation or government promising the
repayment of a loan, usually with interest
Government transfers (p.162) – payments by the government to individuals for which no good
or service is provided in return
Disposable income (p.162) – income plus government transfers minus taxes; the total amount of
household income available to use for consumption and saving
Private savings (p.162) – disposable income minus consumer spending; disposable income that
is not spent on consumption
Financial markets (p.162) – the banking, stock, and bond markets, which channel private
savings and foreign lending into investment spending, government
borrowing, and foreign borrowing
Government borrowing (p.162) – funds borrowed by the government in financial markets
Government purchases of goods and services (p.162) – government expenditures on goods
and services
Exports (p.162) – goods and services sold to residents of other countries
Imports (p.162) – goods and services purchased from residents of other countries
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Investment spending (p.162) – spending on productive physical capital, such as machinery and
construction of structures, and on changes to inventories
GDP Deflator (p.179) – for a given year, 100 times the ratio of nominal GDP to real GDP in
that year
Intermediate goods and services (p.163) - goods and services, bought from one firm by
another firm that is inputs for production of final
goods and services
Gross domestic product (GDP) (p.163) – the total value of all final goods and services
produced in the economy during a given year
Aggregate spending (p.163) – the sum of consumer spending, investment spending, government
purchases, and exports minus imports. It is the total spending on
domestically produced final goods and services in the economy
Value added (p.165) – (of a producer): the value of sales minus the value of input purchases
Net exports (p.168) – the differences between the value of exports and the value of imports. A
positive value for net exports indicates that a country is a net exporter of
goods and services; a negative value indicates that a country is a net
importer of goods and services
Real GDP (p.170) – the value of final goods services produced in the economy during the year;
calculated using a price of a selected base year
Nominal GDP (p.170) – the value of all final goods and services produced in the economy
during the year, calculated using the prices current in the year in which
the output is produced
GDP per capita (p.171) – GDP divided by the size of the population; equivalent to the average
GDP per person
Market basket (p.177) – a hypothetical set of consumer purchases of goods and services, used
to measure changes in the overall price level
Price index (p.177) - a measure of the overall price level; it measures the cost of purchasing a
given market basket in a given year, where that cost is normalized so that
it is equal to 100 in the selected base year
Consumer Price Index (CPI) (p.178) – a measure of the cost of a market basket intended to
represent the consumption of a typical urban American
family of four. It is the most commonly used measure of
prices in the United States
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Producer Price Index (PPI) (p.179) – a measure of the cost of a typical basket of goods and
services purchased by producers. Because these
commodity prices respond quickly to changes in demand,
the PPO is often regarded as a leading indicator of
changes in the inflation rate
Final goods and services (p.163) – goods and services sold to the final, or end, user (Ex. food,
gasoline to consumers, medication to patients, etc.)
Chpt. 8: Key Terms
Rule of 70 (p.189) – a formula that states that the time it takes a variable growing at some annual
rate to double is approximately 70 divided by that variable’s annual growth
rate
Labor productivity (p.191) – output per worker; also referred to as simply productivity;
increases in labor productivity are the only source of long-run
economic growth
Productivity (p.191) - output per worker; aka labor productivity
Physical capital (p.192) – human-made physical resources, such as buildings and machines that
are used in production
Human capital (p.192) – the improvement in labor created by the education and knowledge
embodied in the workforce
Technology (p.192) - the technical means for the production of goods and services
Aggregate production function (p.192) – a hypothetical function that describes how
productivity (real GDP per worker) depends on the
quantities of physical capital per worker and human
capital per worker as well as the state of technology.
It has the general form: Y /L = f(K/L, H/L, T)
Diminishing returns to physical capital (p.193) – property of an aggregate production function
whereby each successive increase in the amount of physical capital,
holding amount of human capital and the state of technology fixed, leads
to a smaller increase in productivity
Growth accounting (p.195) – an estimation of the contribution to economic growth of each of
the major factors (physical and human capital, labor, and
technology) in the aggregate production function. Most growth
accounting finds that increases in total factor productivity are
central to a country’s economic growth.
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Total factor productivity (p.196) – the total amount of output that can be achieved with a given
amount of the factor inputs physical capital, human capital,
and labor. Increases in total factor productivity are central
to economic growth
Infrastructure (p.200) – physical capital, such as roads, power lines, ports, and information
networks, that provides the foundation for economic activity
Research and development (p.200) – spending to create and implement new technologies
Convergence hypothesis (p.203) – a theory of economic growth that holds that international
differences in real GDP per capita tend to narrow over time
because countries with low GDP per capita generally have
higher growth rates
Chpt. 15: Key Terms
Job search (p.370) – the act of looking for employment
Frictional unemployment (p.370) – unemployment due to time spent searching for a job.
Because this type of unemployment can occur even when
jobs exist for all of the unemployed, it does not necessarily
signal a labor surplus.
Structural unemployment (p.371) – unemployment that results when there are more people
seeking jobs in a labor market than there are jobs
available at the current wage rate
Efficiency wages (p.373) – wages that employers set above the equilibrium wage rate as an
incentive for better performance
Natural rate of unemployment (p.373) – the normal unemployment rate arising from frictional
and structural unemployment. The actual
unemployment rate fluctuates around the natural rate.
Cyclical unemployment (p.373) – unemployment resulting from the business cycle;
equivalently, the difference between the actual rate of
unemployment and the natural rate of unemployment
Output gap (p.377) – the percentage difference between the actual level of real GDP and
potential output
Okun’s law (p.379) – the generally observed relationship between the output gap and the
unemployment rate, whereby each additional percentage pint of output gap
reduces the unemployment rate by less than 1 percentage point
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Sticky wages (p.381) – refers to a situation in which employers are slow to change wage rates in
the face of a surplus or shortage of labor
Menu costs (p.382) – small costs associated with the act of changing prices
Short-run Phillips curve (p.383) – a graphical representation of the negative short-run
relationship between the unemployment rate and the inflation
rate
Expected rate of inflation (p.385) – the rate of inflation that employers and workers expect in
the near future
Non-accelerating inflation rate of unemployment, or NAIRI (p.388) – the unemployment rate
at which, other things equal, inflation does not change over time
Long-run Phillips curve (p.388) – a graphical representation of the relationship between
unemployment and inflation after expectations of inflation
have had time to adjust to experience. It is vertical at the
natural rate of unemployment
Chpt. 16: Key Terms
Classical model of the price level (p.395) – a model of the price level in which eh real quantity
of money is always at its long-run equilibrium level. This model ignores
the distinction between the short run and the long run but is useful for
analyzing the case of high inflation
Inflation tax (p.398)
- the reduction in the value of money held by the public caused by
inflation
Nominal interest rate (p.401) – the interest rate unadjusted for inflation
Real interest rate (p.401) – the interest rate adjusted for inflation, equal to the nominal interest
rate minus the inflation rate
Fisher effect (p.402) - the principle by which an increase in expected inflation drives up the
nominal interest rate, leaving the expected real interest rate unchanged
Shoe-leather costs (p.403) – (of inflation); the increased costs associated with making
transactions that arise from the public’s efforts to avoid the
inflation tax
Unit-of-account costs (p.404) – (of inflation); the costs arising from the way inflation makes
money a less reliable unit of measurement
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Price stability (p.405) – a low but positive rate of inflation targeted by most central banks
Disinflation (p.408) – the process of lowering inflation that has become embedded in
expectations by keeping the unemployment rate above the natural rate
for an extended period of time
Debt deflation (p.410) – the reduction in aggregate demand arising from the increase in the real
burden of outstanding debt caused by deflation; occurs because
borrowers, whose real debt rises as a result of deflation, are likely to
cut spending sharply and lenders, whose real assets are now more
valuable, are less likely to increase spending
Zero bound (p.410) – the lower bound of zero on the nominal interest rate
Liquidity trap (p.410) – a situation in which the nominal interest rate has hit its lower bond of
zero as a result, expansionary monetary policy can no longer be used
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