Macroeconomic Definitions


    Cost-Push Inflation. Cost-push inflation occurs when LRAS shifts left because resource prices rise or wages rise, firms’ costs rise and their prices rise.

    Credit Crunch. A situation where banks and other financial institutions decrease their lending or stop lending altogether.

    Crowding In. An increase in government spending causes an increase in private investment (maybe the government invests in the infrastructure which encourages private firms to invest).

    Crowding Out. An increase in government spending causes a decrease in private investment (maybe the government uses resources that private firms would have used).

    Current Account. A record of an economy’s international trade in goods, services, investment income and transfers.

    Deflation. Deflation is a fall in the average price level over a given time period.

    Demand-Deficient Unemployment. AD is insufficient for all workers to be employed.

    Demand-Pull Inflation. Demand-pull inflation occurs when AD rises, spare capacity falls, resources begin to run out so firms’ costs rise and prices rise.

    Direct Tax. Taxes on consumers’ income (income tax) or firms’ profits (corporation tax).

    Economic Growth. A percentage change in real GDP over a given time period.

    Employment. Employment is the amount of workers with a job.

    Exports. Exports are domestic goods and services sold to foreign agents.

    Export-Led Growth. Export-led growth means an economy’s AD and real GDP is rising mainly because its exports are rising rapidly, this could be because the government are promoting exports.

    Exchange Rate. An exchange rate (XR) is the price of one currency in terms of another.

    Expansionary Fiscal Policy. An expansionary fiscal policy means G >T  so AD rises. Multiplier effects make AD rise further. AD shifts right so inflation rises and real GDP rises.

    Fiscal Policy. Fiscal policy is the manipulation of government expenditure (G) and taxation (T) by the government to influence macroeconomic variables.

    Frictional Unemployment. Frictional unemployment occurs when workers are moving between jobs. Workers are unemployed but searching for a new job.

    Full Employment. An economy is at full employment if all resources are fully employed, no more can be produced.

    Government Expenditure. Government expenditure is total expenditure by the government on goods and services.

    Gross Domestic Product. Gross Domestic Product (GDP) measures the monetary value of output produced by an economy during a given time period.

    Human Development Index (HDI). The HDI is a multidimensional measure of the economic development of an economy. The HDI measures a mix of income, health and education.

    Hyperinflation. A period of rapid inflation.

    ILO Unemployment. A measure of unemployment. The ONS carry out the Labour Force Survey. A survey of 60,000 working age people are interviewed four times per year by phone. A person is defined as unemployed if they have been looking for work in the last four weeks and if they are ready to work within the next two weeks.

    Imports. Imports are foreign goods and services bought by domestic agents.

    Indirect Tax. Taxes on expenditure (Ad valorem or specific taxes).

    Inflation. Inflation is a rise in the average price level over a given time period.

    Injection. An injection into the circular flow is money coming into the economy (investment, government spending and exports).

    Interest Elasticity of Investment. The responsiveness of investment to a change in interest rates.

    Interest Rate. The interest rate is the additional money a saver receives for saving and the additional money a borrower pays for taking out a loan.

    Investment. Investment is total investment expenditure by firms on buildings, machinery and the change in inventories.

    Leakage. A leakage from the circular flow is money leaving the economy (saving, taxes and imports).

    Loose Monetary Policy. A loose monetary policy causes interest rates to fall and AD to rise. Multiplier effects make AD rise further. Inflation rises and real GDP rises.

    Long-Term Trend Growth Rate. The long-term trend growth rate is potential real GDP growth, the GDP growth that will occur if all resources are fully and efficiently employed. This increases if technology and/or knowledge improve.

    Macroeconomic Objectives. The government’s main macroeconomic objectives are 1) High economic growth, 2) Low unemployment, 3) Low and stable inflation and 4) A current account surplus or low deficit.

    Marginal Propensity to Consume. Measures how much each additional dollar of income is used for consumption. If the MPC is 0.9: As income rises by £1, consumption rises by £0.90.

    Marginal Propensity to Save. Measures how much each additional dollar of income is saved. If the MPS is 0.1: As income rises by £1, savings rise by £0.10.

    Menu Costs. As prices change, firms must change their prices and reprint menus, catalogues, websites and shop signs, this is costly for firms.

    Monetary Policy. Monetary policy is the manipulation of monetary variables (interest rate and money supply) by the MPC to influence AD and inflation.

    Multiplier. Any AD fluctuations are amplified by the multiplier through knock-on AD effects. An initial change in AD has a larger final impact on real GDP due to the multiplier.

    Net Exports. Net exports are exports minus imports (X-M).

    Output Gap. The difference between actual or real GDP and the trend growth rate.

    Positive Output Gap. Occurs when real GDP is above the trend growth rate.

    Productive Capacity. Productive capacity refers to how much output an economy can produce.

    Productivity. Productivity is output per worker.

    Public Sector Net Cash Requirement. Public sector net cash requirement (PSNCR) is government borrowing over a period of time, the difference between government expenditure and tax revenue.

    Quantitative Easing. Quantitative easing is the control of the money supply by the MPC to influence AD and inflation.

    Real GDP. Real GDP is GDP adjusted for inflation.

    Real Wage Unemployment. Real wage unemployment occurs when real wages are above the market-clearing level, there is excess labour supply, more people are willing and able to work at the going market wage than firms will employ.

    Recession. A recession occurs if real GDP falls for two consecutive quarters.

    Seasonal Unemployment. Seasonal unemployment occurs when workers are unemployed during the off-season.

    Search Costs. As prices change, consumers incur search costs because they must keep up to date with all the new prices that firms charge.

    Spare Capacity. An economy has spare capacity if some resources are unemployed. More resources can be employed and more can be produced.

    Stagflation. A period of rising inflation and rising unemployment.

    Structural Unemployment. Structural unemployment exists when there is a mismatch between labour’s skills and the skills required by employers.

    Supply-Side Policies. Supply-side policies are designed to increase productivity and shift LRAS right.

    Sustainable Growth. Economic growth is sustainable if the needs of future generations are not compromised by current consumption/production.

    Tight Monetary Policy. A tight monetary policy causes interest rates to rise and AD to fall. Multiplier effects make AD fall further. Inflation falls and real GDP falls.

    Unemployment. Unemployment is the amount of people willing and able to work at the market wage but without a job.




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