CLEP Principles of Macroeconomics key terms

The condition where limited resources cannot satisfy all human wants, forcing choices about what to produce, how to produce it, and who receives the output. It underlies every economic decision and gives rise to opportunity cost and trade-offs.

The value of the next-best alternative given up when a choice is made. It includes both explicit monetary costs and implicit costs such as forgone time or income, and it shapes decisions by individuals, firms, and governments.

The inputs used to make goods and services: land (natural resources), labor, capital (machinery and equipment), and entrepreneurship. Payments to these factors are rent, wages, interest, and profit respectively, which together form national income.

A curve showing the maximum combinations of two goods an economy can produce given fixed resources and technology. Points inside the curve are inefficient, points outside are unattainable, and the curve's slope reflects increasing opportunity cost.

The ability to produce a good at a lower opportunity cost than another producer. Specializing according to comparative advantage and trading raises total output even when one party is absolutely better at everything.

The ability to produce more of a good with the same resources, or the same amount with fewer resources, than another producer. It differs from comparative advantage, which is what actually drives mutually beneficial trade.

The price and quantity at which the quantity demanded equals the quantity supplied. At this point there is neither a shortage nor a surplus, and the market clears without upward or downward pressure on price.

The relationship showing how much of a good buyers are willing and able to purchase at each price, holding other influences constant. A change in price causes movement along the curve; changes in income, tastes, or related prices shift it.

The relationship showing how much of a good sellers are willing and able to offer at each price, other things equal. Higher prices generally encourage greater quantity supplied because additional units become profitable to produce.

The market value of all final goods and services produced within a country's borders during a given period, usually a year or quarter. It counts only final output to avoid double counting and excludes transfers and used goods.

GDP measured at current market prices, so it rises both when output grows and when prices rise. Because inflation inflates this figure, it overstates real production gains during inflationary periods.

GDP adjusted for price changes by valuing output at constant base-year prices. It isolates changes in the quantity produced and is the standard measure of economic growth and the business cycle.

A price index equal to nominal GDP divided by real GDP, multiplied by 100. It measures the price level for all goods and services included in GDP, unlike the CPI, which tracks a fixed consumer basket.

The method computing GDP as the sum of consumption, investment, government purchases, and net exports (C + I + G + NX). It reflects the spending side of the circular flow and is the most common textbook calculation.

Household spending on durable goods, nondurable goods, and services. It is the largest component of GDP in most economies and is influenced mainly by disposable income, wealth, expectations, and interest rates.

Spending by firms on new capital goods, plus residential construction and changes in inventories. In national accounts it excludes purchases of financial assets, which are saving rather than capital formation.

Exports minus imports of goods and services. A positive value adds to GDP because foreign spending on domestic output is included, while imports are subtracted since they were not produced domestically.

A measure of the average price of a fixed basket of goods and services purchased by a typical urban household, expressed relative to a base year. It is the most widely cited gauge of inflation facing consumers.

A sustained rise in the general price level, reducing the purchasing power of money. It is commonly measured by percentage changes in the CPI or GDP deflator and can be demand-pull or cost-push in origin.

Inflation caused by aggregate demand growing faster than the economy's productive capacity. It typically appears when the economy operates beyond full employment, and is often described as too much money chasing too few goods.

Inflation arising from rising production costs, such as wage increases or higher input prices, that shift short-run aggregate supply leftward. It raises prices while tending to reduce output and employment, a combination known as stagflation.

The percentage of the labor force that is jobless and actively seeking work. The labor force includes employed and unemployed persons but excludes those not looking, so discouraged workers can make the rate understate true joblessness.

Short-term joblessness from the time needed to search for and match with new jobs, including voluntary transitions. It exists even in a healthy economy and is generally considered part of the natural rate.

Joblessness caused by a mismatch between workers' skills or locations and available jobs, often due to technological change or shifting industry patterns. It persists longer than frictional unemployment and resists simple demand-side fixes.

Unemployment resulting from a downturn in the business cycle, when aggregate demand falls short of what is needed to employ available workers. It rises in recessions and falls in expansions and is the focus of stabilization policy.

The unemployment rate consistent with stable inflation, roughly the sum of frictional and structural unemployment. It is not zero, and attempts to push unemployment below it tend to accelerate inflation.

The total quantity of goods and services demanded at each price level, comprising consumption, investment, government purchases, and net exports. It slopes downward because of wealth, interest-rate, and exchange-rate effects.

The total quantity of goods and services firms produce at each price level. In the short run it slopes upward because some input prices are sticky; in the long run it is vertical at potential output.

A vertical line at the economy's potential output, determined by resources and technology rather than the price level. It marks full-employment output and anchors the long-run equilibrium where actual and expected prices agree.

The maximum sustainable level of real GDP an economy can produce without accelerating inflation, given its labor force, capital stock, and technology. The output gap is the difference between actual and potential GDP.

The process by which an initial change in spending produces a larger final change in equilibrium output, because recipients spend part of the new income. The simple multiplier equals 1 divided by one minus the marginal propensity to consume.

The fraction of each additional dollar of disposable income that households spend on consumption. It determines the size of the spending multiplier, since a higher value means more income is respent in each round.

The use of government spending and taxation to influence aggregate demand, output, and employment. Expansionary policy raises spending or cuts taxes; contractionary policy does the reverse, and both work with a lag.

Features of the budget, such as progressive income taxes and unemployment insurance, that dampen fluctuations without new legislation. They reduce demand in booms and support it in recessions, acting without recognition or implementation lag.

Central bank actions to influence the money supply, interest rates, and credit conditions in pursuit of price stability and full employment. Tools include open market operations, the discount rate, and reserve requirements.

The buying and selling of government securities by a central bank to alter bank reserves and the money supply. Purchases inject reserves and lower interest rates; sales drain reserves and raise them.

The minimum fraction of deposits that banks must hold as reserves rather than lend out. Raising it shrinks the money supply through the deposit multiplier; lowering it expands lending capacity.

The maximum amount the money supply can expand from each dollar of new reserves, approximately equal to one divided by the reserve ratio. Actual expansion is smaller when banks hold excess reserves or the public holds cash.

The interest rate banks charge each other for overnight loans of reserves held at the central bank. It is the primary operating target of monetary policy, and changes in it ripple through other interest rates.

The reduction in private investment that occurs when government borrowing to finance deficits raises interest rates and absorbs loanable funds. It weakens the stimulative effect of expansionary fiscal policy.

A sustained increase in real GDP per capita over time, driven by capital accumulation, labor force growth, and technological progress. Long-run growth shifts the production possibilities frontier outward and raises living standards.

The knowledge, skills, and health embodied in workers that raise their productivity. Investment in education and training is a major source of long-run growth because it improves labor quality.

The difference between a country's exports and imports of goods and services. A surplus means exports exceed imports; a deficit means imports exceed exports and corresponds to net capital inflow.

The price of one currency expressed in units of another. It affects the relative prices of imports and exports, so currency appreciation tends to reduce net exports while depreciation tends to raise them.

An increase in the value of a currency relative to another under floating rates. It makes foreign goods cheaper for domestic buyers but makes domestic exports more expensive abroad, tending to worsen the trade balance.

A decrease in the value of a currency relative to another under floating rates. It makes exports cheaper and imports dearer, which can stimulate net exports and domestic production.

The rate at which one good exchanges for another in trade, or the ratio of export prices to import prices for a country. Favorable terms of trade let a nation obtain more imports per unit of exports.