Macroeconomics glossary

1

10-year Treasury yield

The interest rate on 10-year U.S. government bonds. It reflects expected future short-term rates, expected inflation and a risk (“term”) premium, and it drives mortgage rates.

A

Aggregate demand (AD)

Total spending on a country’s goods and services at each price level: consumption + investment + government purchases + net exports (C + I + G + NX).

Aggregate supply (AS)

The total output firms are willing to produce at each price level. Short-run AS slopes upward; long-run AS is vertical at potential GDP.

Automatic stabilizers

Parts of the budget that cushion recessions without new laws: tax revenue falls and unemployment benefits rise when the economy weakens.

B

Bear market

A fall of 20% or more in stock prices from a recent high. A bull market is a sustained rise.

Budget deficit

When government spending (including interest) exceeds tax revenue in a year. A surplus is the opposite.

Business cycle

The recurring pattern of expansion, peak, recession (contraction) and trough in economic activity.

C

Central bank

The institution that manages a country’s money and interest rates — the Federal Reserve in the U.S., the European Central Bank in the eurozone.

Comparative advantage

The ability to produce something at a lower opportunity cost than others. It is the reason countries gain from specializing and trading.

Consumer & business confidence

How optimistic households and firms feel about the future. Low confidence leads people to save and firms to delay hiring and investment, reducing demand. Keynes called these swings “animal spirits.”

Consumer Price Index (CPI)

A measure of the average price of a basket of goods and services bought by households. Its percent change over a year is the most common measure of inflation.

Consumer surplus

The difference between what buyers are willing to pay and what they actually pay. Producer surplus is the difference between the price sellers receive and their cost.

Crowding out

When heavy government borrowing pushes up interest rates and reduces private investment, offsetting part of the boost from government spending.

D

Deadweight loss

The value lost when a tax, subsidy or price control prevents mutually beneficial trades from happening.

Deflation

A sustained fall in the general price level. It can deepen downturns because people delay purchases and debts become harder to repay.

Depression

A severe, prolonged recession, with very high unemployment and a deep fall in output — most famously the Great Depression of the 1930s.

Disasters & pandemics

Uncontrollable events — pandemics, hurricanes, wars, droughts — that disrupt both production (supply) and spending (demand).

Discount rate

The interest rate the Federal Reserve charges banks for short-term loans from its “discount window.”

E

Elasticity

How strongly quantity demanded or supplied responds to a change in price. Inelastic goods (like gasoline) see little change in quantity when prices change.

Energy prices / oil shock

Sudden changes in the price of oil and energy. Because energy is used to produce and transport almost everything, spikes act as negative supply shocks.

Equilibrium

The price and quantity at which the amount buyers want equals the amount sellers offer.

Expansion

The phase of the business cycle when output, employment and incomes are growing.

F

Federal funds rate

The interest rate at which banks lend reserves to each other overnight. The Federal Reserve sets a target range for it; it is the Fed’s main policy tool.

Fiscal policy

Government decisions about spending and taxes, made by Congress and the President.

G

Global economic growth

How fast the world economy is growing. Faster global growth raises demand for a country’s exports.

Government spending

Purchases of goods and services by government plus transfer programs. Government purchases (G) are part of aggregate demand.

Gross Domestic Product (GDP)

The market value of all final goods and services produced in a country in a period. Real GDP adjusts for inflation.

H

Home price growth

The percentage change in home prices over a year, often measured by the S&P CoreLogic Case-Shiller index.

Housing supply & zoning

How easily new homes can be built, shaped by zoning laws, permits, land and construction costs.

Hyperinflation

Extremely rapid inflation — often defined as 50% or more per month — usually caused by printing money to finance government spending.

I

Inflation

A sustained rise in the general level of prices, which reduces the purchasing power of money. The Fed targets about 2% per year.

L

Labor force

People who are working or actively looking for work. Its growth depends on population, immigration and participation.

Lending standards

How strict banks are about who can borrow. Tight standards reduce borrowing and spending; loose standards can fuel bubbles.

M

Monetary policy

Actions by a central bank to influence interest rates and the money supply in pursuit of stable prices and maximum employment.

Money multiplier

How much the banking system can expand deposits from new reserves: in the simple model, 1 ÷ the reserve ratio.

Money supply (M2)

M2 counts cash, checking and savings deposits and similar assets. Money growing much faster than output tends to cause inflation.

Mortgage rate

The interest rate on a home loan. U.S. 30-year fixed mortgage rates move with the 10-year Treasury yield.

N

National debt

The total amount the federal government owes from past borrowing. Often measured as a percentage of GDP. The deficit is one year’s borrowing; the debt is the running total.

Natural rate of unemployment

The unemployment rate when the economy is at full strength — frictional plus structural unemployment, around 4–4.5% in the U.S.

O

Okun’s law

A rule of thumb that each 1 percentage point of unemployment above its natural rate is associated with output roughly 2% below potential.

P

Phillips curve

The short-run trade-off between unemployment and inflation. In the long run, once expectations adjust, the trade-off largely disappears.

Price ceiling

A legal maximum price (e.g., rent control). If set below equilibrium it causes shortages.

Price floor

A legal minimum price (e.g., minimum wage). If set above equilibrium it causes surpluses.

Productivity

Output per worker or per hour. The main driver of long-run growth in living standards and real wages.

Q

Quantitative easing (QE)

Large-scale purchases of bonds by a central bank to push down long-term interest rates and add money to the economy, used when short-term rates are already near zero.

R

Real GDP growth

The percentage change in inflation-adjusted GDP. About 2% a year is typical for the U.S.; negative growth signals contraction.

Real vs. nominal

Nominal values are in current dollars; real values are adjusted for inflation. Real interest rate ≈ nominal rate − expected inflation.

Real wages

Wages adjusted for inflation — what a paycheck can actually buy.

Recession

A significant decline in economic activity spread across the economy, lasting more than a few months. Two straight quarters of falling real GDP is a common rule of thumb.

Regulation

Government rules on businesses and banks. Regulation can protect consumers and financial stability but also raises costs.

S

Stagflation

A combination of stagnant growth, rising unemployment and high inflation, usually caused by a supply shock.

Stock market

Where shares of companies are traded. Prices reflect expected profits, interest rates and investor confidence. The S&P 500 tracks 500 large U.S. companies.

Supply shock

A sudden event that changes the economy’s ability to produce, such as an oil embargo or pandemic.

T

Tariff

A tax on imported goods. Tariffs raise prices for consumers and can invite retaliation against exporters.

Taxes

Money the government collects from income, payroll, corporate and other taxes. In the simulator, total federal revenue as a share of GDP.

Taylor rule

A formula proposed by economist John Taylor: the policy rate should rise by more than one-for-one with inflation and also respond to the output gap.

U

Unemployment rate

The percentage of the labor force that is jobless and actively looking for work.

Y

Yield curve

A chart of interest rates on bonds of different maturities. When short-term rates rise above long-term rates (an “inverted” curve), a recession has often followed.