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The companion to Macroeconomics for Beginners
Macroeconomics Online Center
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6 learning parts19 companion lessons210 flashcards
Macroeconomics flashcards
All 210 terms from the book’s glossary, grouped by part. Say the meaning in your own words, reveal the definition, and think of an example. Five or ten cards make a useful short review.
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Read all 210 definitions
- economic model
- A simplified representation that isolates selected relationships so economists can explain or predict an outcome under stated assumptions.
- ceteris paribus
- The assumption that relevant factors not named in the analysis remain unchanged.
- endogenous variable
- A quantity whose value is determined inside the model being used.
- exogenous change
- A change introduced from outside the model that shifts one of its relationships.
- positive statement
- A claim about what is, was, or will be that can in principle be checked against evidence.
- normative statement
- A judgment about what ought to be that depends partly on values or policy objectives.
- stock
- A quantity measured at a particular moment in time.
- flow
- A quantity measured over an interval of time.
- percentage change
- The change in a quantity divided by its original value, multiplied by 100.
- percentage point
- One unit of difference between two values already expressed as percentages.
- price index
- A number that compares the cost or price level of a defined set of items with its base-period value.
- base year
- The reference period whose index is conventionally assigned a value of 100.
- nominal value
- A value measured in current prices without removing the effect of price-level change.
- real value
- A value adjusted for changes in the price level so quantities can be compared across time.
- slope
- The change in the vertical-axis variable divided by the change in the horizontal-axis variable.
- movement along a curve
- A change in an axis variable that moves the outcome to another point on the same relationship.
- curve shift
- A change in a non-axis determinant that moves the entire relationship.
- equilibrium
- A model outcome at which the relevant plans or forces are mutually compatible.
- indeterminate result
- An outcome whose direction cannot be known without the relative size of two or more opposing changes.
- scarcity
- The condition in which available resources cannot satisfy every valued use at the same time.
- opportunity cost
- The value of the next-best alternative sacrificed when a choice is made.
- marginal analysis
- Comparing the additional benefit of one more unit of an activity with its additional cost.
- sunk cost
- A cost already incurred that cannot be recovered and should not determine a current marginal choice.
- production possibilities frontier
- A curve showing the maximum attainable combinations of two outputs with current resources and technology.
- productive efficiency
- A condition in which output cannot be increased without reducing production of something else.
- allocative efficiency
- A product mix for which the marginal social benefit of the last unit equals its marginal social cost.
- economic growth
- An increase in an economy's capacity to produce goods and services over time.
- absolute advantage
- The ability to produce more output with the same resources or the same output with fewer resources.
- comparative advantage
- The ability to produce a good or service at a lower opportunity cost than another producer.
- specialization
- Concentrating production on the goods or tasks for which a producer has a comparative advantage.
- terms of trade
- The rate at which one good, service, or currency exchanges for another.
- demand
- The quantities buyers are willing and able to purchase at different prices during a stated period, other things equal.
- quantity demanded
- The amount buyers are willing and able to purchase at one particular price.
- supply
- The quantities sellers are willing and able to offer at different prices during a stated period, other things equal.
- quantity supplied
- The amount sellers are willing and able to offer at one particular price.
- equilibrium price
- The price at which quantity demanded equals quantity supplied.
- equilibrium quantity
- The quantity buyers purchase and sellers sell at the equilibrium price.
- shortage
- A condition in which quantity demanded exceeds quantity supplied at the current price.
- surplus
- A condition in which quantity supplied exceeds quantity demanded at the current price.
- demand determinant
- A factor other than the good's own price that changes the quantity buyers demand at every possible price and therefore shifts the demand curve.
- supply determinant
- A factor other than the good's own price that changes the quantity sellers supply at every possible price and therefore shifts the supply curve.
- tax incidence
- The division of a tax's economic burden between buyers and sellers.
- elasticity
- A measure of how strongly one economic quantity responds to a change in another.
- tariff
- A tax imposed on an imported good or service.
- circular flow
- A model of the exchanges of resources, products, income, and spending among sectors of the economy.
- gross domestic product
- The market value of final goods and services produced within a country during a stated period.
- final good
- A good or service purchased for final use rather than for resale or further production during the measured period.
- intermediate good
- A good or service used up in producing another good or service during the measured period.
- value added
- A producer's output value minus the value of intermediate inputs purchased from other producers.
- consumption
- Household spending on newly produced goods and services, excluding purchases classified as residential investment.
- gross private domestic investment
- Business fixed investment, residential construction, and changes in private inventories.
- government purchases
- Government consumption expenditures and gross investment in currently produced goods and services.
- net exports
- Exports of goods and services minus imports of goods and services.
- nominal GDP
- Gross domestic product valued at the current prices of the measured period.
- real GDP
- Gross domestic product valued with prices held constant to isolate changes in production.
- GDP deflator
- A broad price index equal to nominal GDP divided by real GDP and multiplied by 100.
- consumer price index
- An index measuring average change over time in prices consumers pay for a representative basket of goods and services.
- PCE price index
- A U.S. Consumer-price measure produced within the national accounts using coverage and weights that differ from the consumer price index.
- inflation
- A sustained increase in the economy's overall price level.
- deflation
- A sustained decrease in the economy's overall price level.
- disinflation
- A decrease in the inflation rate while the overall price level continues to rise.
- indexation
- Automatic adjustment of a nominal payment or value in response to a specified price index.
- labor force
- The sum of people classified as employed and unemployed.
- employed
- In official U.S. Measurement, a person age 16 or older in the civilian noninstitutional population who did work for pay or profit, performed qualifying unpaid family work, or had a job from which the person was temporarily absent during the reference week.
- unemployed
- In official U.S. Measurement, a jobless person who is available for work and either actively searched during the previous four weeks or is on temporary layoff and expects recall.
- not in the labor force
- A person age 16 or older in the civilian noninstitutional population who is classified as neither employed nor unemployed.
- unemployment rate
- The number of unemployed people divided by the labor force, multiplied by 100.
- labor force participation rate
- The labor force divided by the civilian noninstitutional population age 16 and older, multiplied by 100.
- frictional unemployment
- Short-term unemployment arising as workers search for jobs that better match their skills and preferences.
- structural unemployment
- Unemployment caused by a mismatch between workers' skills or locations and the jobs available.
- cyclical unemployment
- Unemployment caused by a decline in aggregate demand during an economic contraction.
- natural rate of unemployment
- The unemployment rate associated with frictional and structural unemployment when cyclical unemployment is zero.
- discouraged worker
- A person who wants and is available for a job but stopped searching because the person believes no work is available.
- business cycle
- Recurring fluctuations in aggregate economic activity around the economy's long-run growth path.
- expansion
- The business-cycle phase in which aggregate economic activity rises.
- recession
- The business-cycle phase in which aggregate economic activity falls.
- peak
- The business-cycle turning point from expansion to recession.
- trough
- The business-cycle turning point from recession to expansion.
- actual output
- The real GDP an economy produces during a stated period.
- aggregate demand
- The relationship between the overall price level and the quantity of domestic real output demanded, other things equal.
- wealth effect
- The tendency for a higher price level to reduce the purchasing power of fixed nominal wealth and therefore reduce spending.
- interest-rate effect
- The tendency for a higher price level to raise money demand and interest rates, reducing interest-sensitive spending in the standard AD model.
- net-export effect
- The tendency for a higher domestic price level relative to foreign prices to reduce exports and increase imports, lowering net exports.
- disposable income
- Personal income available after personal taxes, used for consumption or saving.
- consumption function
- A behavioral relationship showing planned consumption at different levels of disposable income.
- marginal propensity to consume
- The fraction of an additional dollar of disposable income that households plan to consume.
- marginal propensity to save
- The fraction of an additional dollar of disposable income that households plan to save.
- autonomous spending
- Planned spending that does not depend on the current level of real income in the simple expenditure model.
- spending multiplier
- The total change in equilibrium output divided by the initial change in autonomous spending.
- tax multiplier
- The change in equilibrium output divided by an autonomous change in taxes in the simple model.
- short-run aggregate supply
- The relationship between the price level and real output firms produce when some input prices and expectations adjust slowly.
- long-run aggregate supply
- The economy's sustainable potential output when wages, prices, and expectations have fully adjusted.
- potential output
- The sustainable level of real output produced when labor and other resources are at normal full-employment use.
- sticky wage
- A wage that adjusts slowly because of contracts, norms, information, or other frictions.
- supply shock
- An unexpected change in production conditions that shifts short-run aggregate supply.
- stagflation
- The combination of rising inflation or price-level pressure with falling real output and rising unemployment.
- short-run macroeconomic equilibrium
- The real GDP and price level at which aggregate demand intersects short-run aggregate supply.
- recessionary gap
- The amount by which equilibrium real GDP lies below potential output.
- inflationary gap
- The amount by which short-run equilibrium real GDP lies above potential output.
- output gap
- The difference between actual or equilibrium real output and potential output.
- self-correction
- Adjustment of wages, input prices, and expectations that moves short-run aggregate supply toward long-run equilibrium after a demand shock.
- demand shock
- An unexpected change in planned aggregate spending that shifts aggregate demand.
- money
- Assets generally accepted as payment for goods and services and settlement of debts.
- medium of exchange
- A function of money that allows it to be traded for goods and services.
- unit of account
- A common monetary measure used to quote prices and record debts.
- store of value
- An asset's ability to transfer purchasing power from the present to the future.
- liquidity
- The ease and speed with which an asset can be used for payment without significant loss of value.
- fiat money
- Money accepted because of legal and social institutions rather than redemption for a commodity.
- M1
- The Federal Reserve's narrow monetary aggregate consisting of currency, demand deposits, and other liquid deposits, including savings deposits under the current definition.
- M2
- M1 plus small-denomination time deposits and retail money market fund balances, subject to official definition details.
- financial asset
- A claim that gives its owner a right to future payment or income from another party.
- bond
- A debt instrument promising specified payments to its holder.
- coupon
- A bond's stated periodic interest payment.
- yield
- The return on a financial asset relative to the price paid for it.
- present value
- The current value of a future payment discounted at the relevant interest rate.
- future value
- The amount to which a present sum grows after earning a stated compound return for a specified number of periods.
- nominal interest rate
- The stated percentage return or borrowing cost measured in current dollars.
- real interest rate
- The nominal interest rate adjusted for inflation or expected inflation.
- bank balance sheet
- A statement of a bank's assets, liabilities, and owners' equity at a moment in time.
- reserve balances
- Deposits that eligible depository institutions hold in accounts at Federal Reserve Banks.
- vault cash
- Currency physically held by a depository institution.
- checkable deposit
- A bank liability that a depositor can use for payments.
- bank capital
- Owners' equity equal to a bank's assets minus its liabilities.
- required reserves
- Reserves a bank must hold under a stated reserve requirement in the textbook model.
- excess reserves
- Reserves held above a stated required amount in the textbook model.
- simple deposit multiplier
- The reciprocal of the required reserve ratio under assumptions of no currency drain, no excess reserves, and full relending.
- currency drain
- Cash the public holds instead of redepositing in banks, reducing repeated deposit expansion.
- money demand
- The quantity of money balances people and firms wish to hold at alternative nominal interest rates.
- money supply
- The quantity of money available under the definition and model being used.
- loanable funds
- A model of saving supplied and borrowing for investment or government deficits demanded at alternative real interest rates.
- national saving
- Private saving plus government saving, equal to income not used for private consumption or government purchases.
- investment demand
- The quantity of planned investment financed at alternative real interest rates.
- crowding out
- A reduction in private investment or other interest-sensitive spending caused when government borrowing or another expansionary action puts upward pressure on interest rates or otherwise uses scarce resources.
- Fisher relation
- The approximate relationship nominal interest rate equals real interest rate plus expected inflation.
- velocity of money
- The average number of times a unit of money is used to purchase domestically produced final goods and services during a period, measured as nominal GDP divided by the money stock.
- quantity equation
- The identity MV=PY, which equates money multiplied by velocity with nominal output.
- quantity theory of money
- The conditional theory that sustained money growth chiefly determines sustained inflation in the long run when velocity is stable and real output is governed by productive capacity.
- reserve market
- A model in which reserve demand and reserve supply determine a policy interest rate at an equilibrium quantity of reserves.
- reserve demand
- The quantities of reserve balances depository institutions wish to hold at alternative policy rates.
- reserve supply
- The quantity of reserve balances supplied by the central bank, drawn vertically in the standard reserve-market model.
- limited-reserves framework
- A policy-implementation framework in which reserve supply intersects the downward-sloping portion of reserve demand and open-market operations move the policy rate by changing reserve quantity.
- Federal Reserve System
- The central banking system of the United States.
- Federal Open Market Committee
- The Federal Reserve body that sets the stance of U.S. Monetary policy, including the target range for the federal funds rate.
- federal funds rate
- The interest rate on overnight unsecured borrowing of reserve balances among eligible institutions.
- target range
- The interval set by the FOMC for the federal funds rate.
- interest on reserve balances
- The administered rate the Federal Reserve pays on eligible reserve balances and a principal tool of current policy implementation.
- ample-reserves regime
- A framework in which reserve supply is ample and administered rates primarily control short-term interest rates.
- open-market operation
- A Federal Reserve purchase or sale of securities that changes the composition and size of its balance sheet and reserve balances.
- discount window
- Federal Reserve lending facilities through which eligible depository institutions can borrow, subject to terms and collateral.
- expansionary monetary policy
- A policy stance intended to lower interest rates and support aggregate demand and employment.
- contractionary monetary policy
- A policy stance intended to raise interest rates and restrain aggregate demand and inflation pressure.
- transactions demand
- Money balances held to bridge the timing difference between income receipts and routine payments.
- asset demand
- Money balances held as part of a portfolio because money is liquid and relatively stable in nominal value.
- liquidity preference
- The preference for holding wealth in readily spendable form rather than less liquid assets.
- Board of Governors
- The seven-member federal body that oversees the Federal Reserve System and participates in monetary-policy decisions.
- ample-reserves framework
- A policy-implementation framework in which reserve balances are abundant and administered rates guide overnight market rates.
- fiscal policy
- Changes in government purchases, taxes, or transfers intended to affect aggregate demand, distribution, or productive capacity.
- expansionary fiscal policy
- An increase in government purchases, reduction in net taxes, or increase in transfers intended to raise aggregate demand.
- contractionary fiscal policy
- A reduction in government purchases, increase in net taxes, or reduction in transfers intended to restrain aggregate demand.
- automatic stabilizer
- A tax or spending provision that changes automatically with economic activity and dampens fluctuations without new legislation.
- discretionary fiscal policy
- A deliberate legislative or administrative change in government purchases, taxes, or transfers.
- balanced-budget multiplier
- In the simple model, the change in equilibrium output from equal changes in government purchases and lump-sum taxes; its value is one.
- budget deficit
- The amount by which government spending exceeds government revenue during a stated period.
- budget surplus
- The amount by which government revenue exceeds government spending during a stated period.
- public debt
- The stock of outstanding government borrowing obligations at a point in time.
- primary deficit
- The government deficit excluding net interest payments on existing debt.
- cyclical deficit
- The portion of a budget deficit associated with an economy operating below potential and automatic fiscal responses.
- structural deficit
- The estimated budget deficit that would remain if the economy were operating near potential under current policy.
- policy mix
- The combined monetary and fiscal policy stances affecting the economy at the same time.
- monetary accommodation
- A monetary response that supports a fiscal expansion or prevents its associated interest-rate pressure from fully occurring.
- transmission mechanism
- The sequence through which a policy instrument changes financial conditions, spending, output, employment, and prices.
- policy lag
- A delay in recognizing a problem, deciding or implementing policy, or receiving its economic effects.
- policy rule
- A systematic formula or framework linking a policy instrument to observable economic conditions.
- discretion
- Case-by-case policy judgment rather than automatic adherence to a fixed rule.
- time inconsistency
- A conflict in which a future policy promise becomes tempting to abandon after people have acted on it.
- credibility
- The degree to which the public believes a policymaker will carry out announced objectives and responses.
- forward guidance
- Communication intended to influence current expectations of future policy and financial conditions.
- short-run Phillips curve
- The inverse relationship between inflation and unemployment for a given expected inflation rate, natural rate, and supply environment.
- long-run Phillips curve
- A vertical relationship at the natural unemployment rate after inflation expectations fully adjust.
- expected inflation
- The inflation rate households, firms, and investors anticipate for a future period.
- real GDP per capita
- Inflation-adjusted domestic output divided by population, used as an average material-living-standard measure.
- labor productivity
- Real output produced per worker or per hour of labor input.
- Rule of 70
- An approximation that divides 70 by an annual percentage growth rate to estimate doubling time in years.
- convergence
- The conditional tendency for poorer economies to grow faster and move toward richer economies' income levels.
- physical capital
- Produced tools, machines, structures, and infrastructure used to produce other goods and services.
- human capital
- Knowledge, skills, experience, and health embodied in people that raise productive ability.
- technology
- Knowledge about methods for transforming inputs into goods and services.
- diminishing returns
- A pattern in which additional units of one input add progressively less output when other inputs and technology are fixed.
- total factor productivity
- Output efficiency not explained by measured labor and capital input growth, reflecting technology, organization, allocation, and measurement.
- property rights
- Enforceable rules governing ownership, use, transfer, and income from resources and assets.
- balance of payments
- A double-entry record of transactions between a country's residents and the rest of the world during a period.
- current account
- Exports minus imports of goods and services plus net primary income and net secondary income.
- trade balance
- Exports of goods and services minus imports of goods and services.
- primary income
- Labor and investment income received from abroad minus comparable income paid abroad.
- secondary income
- One-way current transfers received from abroad minus transfers sent abroad.
- capital account
- The usually small balance-of-payments account for capital transfers and transactions in nonproduced, nonfinancial assets; ordinary cross-border investment belongs in the financial account.
- financial account
- The balance-of-payments account recording cross-border acquisitions and disposals of financial assets and liabilities.
- capital inflow
- Net foreign acquisition of domestic financial claims or domestic borrowing from abroad.
- foreign exchange market
- The market in which one currency is exchanged for another.
- currency demand
- The quantities of a currency buyers wish to acquire at alternative exchange rates to purchase that currency area's goods, services, and financial assets.
- currency supply
- The quantities of a currency holders wish to exchange for another currency at alternative exchange rates to purchase foreign goods, services, and financial assets.
- equilibrium exchange rate
- The exchange rate at which the quantity of a currency demanded equals the quantity supplied in the foreign-exchange market.
- appreciation
- An increase in a currency's value relative to another currency under a floating exchange rate.
- depreciation
- A decrease in a currency's value relative to another currency under a floating exchange rate.
- floating exchange rate
- A currency value determined primarily by market demand and supply.
- fixed exchange rate
- An exchange-rate regime in which the monetary authority commits to defend a stated currency value or narrow band.
- managed float
- An exchange-rate regime in which the currency moves with market conditions but the monetary authority sometimes intervenes.
- policy trilemma
- The constraint that a country cannot simultaneously maintain a fixed exchange rate, free international capital movement, and fully independent monetary policy.
- foreign-exchange intervention
- A central bank's purchase or sale of currencies or reserve assets to influence or maintain an exchange rate.
- purchasing-power parity
- A long-run theory that exchange rates adjust to offset price-level differences for comparable tradable baskets.
Your six-part lesson map
Start with Chapter 1 in the book. These 19 existing companion lessons support Chapters 2 to 20 and open in a new tab. Use the book’s chapter numbers to find your place.
Foundations
Start with economic reasoning, then learn how scarcity, trade, and markets connect individual choices.
01 · Thinking Like a Macroeconomist
Begin with Chapter 1 in the book. It introduces models, evidence, stocks and flows, and the difference between facts and value judgments.
Begin with Chapter 1 in the book. It introduces models, evidence, stocks and flows, and the difference between facts and value judgments.
Measuring the economy
Read output, prices, and employment carefully. Learn what each statistic leaves out.
Economic fluctuations
Use aggregate demand and supply to explain changes in output and the price level.
Money, banking, and interest rates
Follow the connections among financial assets, bank lending, interest rates, and central-bank policy.
Policy and long-run growth
Compare policy choices, their limits, and the conditions that support higher living standards.
The global economy
Connect trade, international financial flows, exchange rates, and policy constraints.
Find all twelve practice tests
The book has two printed tests and ten additional online tests. Both printed tests also have matching online versions, so you can choose paper or screen without changing the questions.
Book Tests 1 and 2
Scan or click the QR code beside the introduction to the printed test. It opens the matching online version.
Ten additional tests
Use the ten numbered QR cards on the online-test access page after the printed tests. Each card opens its own additional test.
Review the reasoning
Submit a test to see multiple-choice feedback. Compare your written responses with the model answers and rubrics; written responses are not automatically graded.
The full-length test links are supplied in the book, not listed on this public page. Each test contains 60 multiple-choice questions and three analytical-response prompts. They are learning checks, not official exam scores.
Check the distinction that matters
Price level or inflation?
If inflation falls from 6% to 3%, prices are still rising, just more slowly. A falling inflation rate does not mean a falling price level.
A stock or a flow?
Public debt is measured at a point in time. A budget deficit is measured over a period. Name the time period before comparing figures.
A model or a prediction?
State what the model holds constant. An upward shift in spending does not by itself tell you the exact size or timing of a real-world change.
Make your next study session small
Choose one chapter. Read its main explanation and work through one example without skipping the reasoning. Close the page and describe what changed, what stayed fixed, and why the result followed. Revisit the relevant flashcards before moving on.
Do I need to complete a full test after every chapter?
No. Use the book’s short chapter reviews and part-end practice while you learn. Save the cumulative tests for when you have studied several connected topics.
Can I study without the book?
Yes. The companion lessons and all 210 flashcards are available here without an account. The book supplies the full reading sequence, worked examples, part-end practice, and access to the twelve full-length tests.
What if a test QR code opens the wrong page?
Check whether you are using a QR code for a printed test or a card for an additional online test; their numbering serves two different lists. If the destination still does not match, contact Reza@effortlessmath.com with the book title and test label.
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Macroeconomics: study questions
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