CLEP Principles of Macroeconomics flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Opportunity cost
- The value of the next-best alternative given up when a choice is made. It underlies the bowed-out shape of the production possibilities frontier and all cost-benefit decisions.
- Comparative advantage
- The ability to produce a good at a lower opportunity cost than another producer. Specialization according to comparative advantage increases total output and creates gains from trade.
- Law of demand
- The principle that quantity demanded falls as price rises, ceteris paribus. Price changes move along the demand curve; changes in income or tastes shift the curve.
- Price ceiling
- A legal maximum price set below equilibrium. It creates a shortage because quantity demanded exceeds quantity supplied, forcing non-price rationing such as queues or black markets.
- Gross domestic product
- The market value of all final goods and services produced within a country in a given period. It equals consumption plus investment plus government purchases plus net exports.
- Real GDP
- GDP valued at base-year prices, so it reflects changes in output rather than prices. It is the standard measure for comparing economic growth across years.
- GDP deflator
- A price index covering all domestic output, computed as nominal GDP divided by real GDP times 100. Unlike the CPI, it is not based on a fixed consumer basket.
- Consumer price index
- A measure of the cost of a fixed basket of consumer goods relative to its cost in a base year, multiplied by 100. Its percentage change is the inflation rate.
- Unemployment rate
- The number of unemployed persons divided by the labor force, times 100. The labor force includes employed and actively seeking workers, excluding discouraged workers.
- Aggregate demand
- The total quantity of real output demanded at each price level. It slopes downward due to wealth, interest-rate, and net-export effects and shifts with spending components.
- Short-run aggregate supply
- The quantity of output firms supply at each price level when wages and prices are sticky. It slopes upward and shifts with input costs and productivity.
- Long-run aggregate supply
- A vertical curve at potential output, determined by resources and technology rather than the price level. It marks the economy's sustainable full-employment output.
- Spending multiplier
- The ratio of a change in equilibrium output to an autonomous spending change, equal to 1 divided by (1 minus the marginal propensity to consume).
- Marginal propensity to consume
- The fraction of an additional dollar of disposable income spent on consumption. It plus the marginal propensity to save equals one, and it determines the multiplier.
- Crowding out
- The reduction in private investment caused by government borrowing raising interest rates. It weakens the expansionary effect of deficit-financed fiscal policy.
- Money multiplier
- The maximum expansion of deposits from a unit of excess reserves, equal to 1 divided by the required reserve ratio. It assumes banks lend all excess reserves.
- Required reserve ratio
- The fraction of checkable deposits banks must hold as reserves. A lower ratio raises excess reserves and increases the money-creating capacity of the banking system.
- Open-market operations
- Central bank purchases or sales of government securities. Purchases add reserves and lower interest rates; sales drain reserves and raise rates.
- Money demand
- The quantity of money people wish to hold, rising with income and falling with the interest rate, which is the opportunity cost of holding money.
- Bond price and interest rate
- An inverse relationship: when market interest rates rise, the fixed payments of existing bonds are worth less, so their prices fall, and vice versa.
- Phillips curve
- A curve showing the short-run inverse relationship between inflation and unemployment. It shifts with changes in expected inflation or supply shocks.
- Natural rate of unemployment
- The unemployment rate when the economy is at potential output, equal to frictional plus structural unemployment. Cyclical unemployment is zero at this rate.
- Frictional unemployment
- Short-term unemployment from the search for a new job or movement between jobs. It persists even in a healthy economy and is not caused by weak demand.
- Structural unemployment
- Unemployment from a mismatch between workers' skills or locations and available jobs, often caused by technology or trade shifts. It is not cured by demand stimulus.
- Rational expectations
- The view that people use all available information, including policy announcements, to forecast inflation. Anticipated policy therefore has little short-run real effect.
- Fisher equation
- The real interest rate approximately equals the nominal interest rate minus the expected inflation rate. It links nominal returns to purchasing-power gains.
- Rule of 70
- A shortcut giving the years for a value to double as 70 divided by its annual percentage growth rate. It illustrates compounding in long-run growth analysis.
- Human capital
- The skills, knowledge, and health embodied in workers, built through education and training. It raises productivity and is a major source of long-run growth.
- Diminishing returns to capital
- Each additional unit of capital per worker raises output by less than the previous one. Sustained growth therefore requires technological progress, not capital alone.
- Balance of payments
- A record of a country's transactions with the world: current account, financial account, and official reserves. The accounts must sum to zero.
- Currency appreciation
- A rise in a currency's value in terms of other currencies. It makes exports more expensive abroad and imports cheaper, tending to reduce net exports.
- Tariff
- A tax on imported goods. It raises domestic prices, protects domestic producers, reduces import quantity, and may provoke retaliatory trade barriers.