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MacroEcon Exam 2 Terms


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The dollar is less valuable therefore prices are higher. Higher prices cause the dollar to be less valuable. The general rise in prices. It is caused by an increase in the money supply. Measured by CPI.
CPI (Consumer Price Index)
Allows to adjust older prices for inflation.
business cycle
economic activity that consists of peaks, recessions, troughs and recovery phases.
The portion of the labor force that is unemployed.
Labor Force
Unemployed + Employed
unemployment type associated with job search.
unemployment type associated with technological change.
unemployment type associated with economic recession.
full employment
1. The use of all available resources to produce want satisfying goods and services.
2. The situation in which the unemployment rate is equal to the full employment unemployment rate and there is structural and frictional unemployment but no cyclical unemployment. The real GDP of the economy equals its potential output.
natural rate of unemployment
The full employment unemployment rate. Only structural and frictional unemployment are included, not cyclical unemployment. The unemployment rate at which actual inflation equals expected inflation.
Okun's Law
The generalization that any 1-percentage point rise in the unemployment rate above the full employment rate will increase the GDP-gap by 2 percent of the potential output (GDP) of the economy.
expected rate of return
The anticipated profit obtained via capital investment.
investment demand curve
A curve that shows the amouns of investment demanded by an economy at a series of real interest rates.
real interest rate
The interest rate expressed in dollars of constant value (adjusted for inflation).
The ratio of change in the equillibrium GDP to the change in investment or in any other component of Aggregate deamnd or expenditures. (the number by which a change in any part of AD or AgExp must be multiplied to find the resulting change in the equilibrium.
full employment GDP
GDP at its potential output. UR is equal to NRU.
fiscal policy
Changes in G or T aimed toward acheiving Full employment and price stability (controlled inflation).
Cost Push Inflation
Increases in the price level (inflation) resulting from an increase in resources costs and hence in per-unit production costs. Also, Inflation caused by reductions in aggregate demand.
Demand Pull Inflation
Increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in a aggregate demand.
Determinants of Aggregate Supply
Input Prices
Legal environment
Determinants of Aggregate Demand
Consumer Spending
Investment Spending
Government Spending
Net Export Spending
crowding out effect
A rise in interest rates that leads to a reduction in Investment caused by the Federal Govt. borrowing in the money market.

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