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Macroeconomics Terms Explained

30+ core macroeconomics terms in plain English — GDP, inflation, monetary and fiscal policy, and more. Built for intro macroeconomics students.

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A

Aggregate Demand
The total demand for all goods and services in an economy at a given price level and time.
Aggregate Supply
The total supply of goods and services that firms in an economy plan to sell at a given price level and time.

B

Balance of Trade
The difference between the value of a country's exports and imports of goods and services.
Business Cycle
The recurring pattern of expansion and contraction in overall economic activity, measured primarily by fluctuations in GDP.

C

Consumer Price Index (CPI)
A measure of the average change over time in the prices paid by consumers for a basket of goods and services, commonly used to track inflation.
Contractionary Policy
Government or central bank action intended to slow down economic growth, typically by raising interest rates or reducing government spending.

D

Deflation
A general decrease in the price level of goods and services in an economy over time.
Demand-Pull Inflation
Inflation that occurs when aggregate demand for goods and services exceeds aggregate supply.
Discount Rate
The interest rate a central bank charges commercial banks for short-term loans.

E

Exchange Rate
The value of one country's currency in terms of another currency.
Expansionary Policy
Government or central bank action intended to stimulate economic growth, typically through lower interest rates or increased government spending.

F

Federal Funds Rate
The interest rate at which banks lend reserve balances to other banks overnight, set as a target by a central bank (in the U.S., the Federal Reserve).
Fiscal Policy
The use of government spending and taxation to influence the economy.

G

GDP Deflator
A measure of the price level of all new, domestically produced goods and services in an economy, used to convert nominal GDP into real GDP.
Gross Domestic Product (GDP)
The total monetary value of all finished goods and services produced within a country's borders in a specific time period.
Gross National Product (GNP)
The total value of goods and services produced by a country's residents, whether located domestically or abroad.

I

Inflation
A general increase in prices and fall in the purchasing value of money over time.

L

Labor Force Participation Rate
The percentage of the working-age population that is either employed or actively looking for work.

M

Monetary Policy
The actions a central bank takes to manage the money supply and interest rates in order to influence economic activity.
Multiplier Effect
The phenomenon where an initial change in spending leads to a larger overall change in economic activity, as money circulates through the economy.

N

National Debt
The total amount of money a country's government owes to creditors, accumulated from past budget deficits.
Natural Rate of Unemployment
The unemployment rate that exists when an economy is at full employment, accounting for frictional and structural unemployment.
Nominal GDP
The value of all goods and services produced in an economy, measured using current prices, without adjusting for inflation.

O

Okun's Law
An empirically observed relationship stating that for every 1% increase in the unemployment rate, a country's GDP will be roughly 2% lower than its potential GDP.
Open Market Operations
The buying and selling of government securities by a central bank to control the money supply.

P

Phillips Curve
An economic model showing an inverse relationship between the rate of inflation and the rate of unemployment.

R

Real GDP
GDP that has been adjusted for inflation, reflecting the true value of goods and services produced.
Recession
A significant decline in economic activity spread across the economy, typically identified by two consecutive quarters of falling GDP.

S

Stagflation
An economic condition characterized by the simultaneous occurrence of stagnant economic growth, high unemployment, and high inflation.
Structural Unemployment
Unemployment caused by a mismatch between the skills workers have and the skills employers need, often due to technological change.
Supply-Side Policy
Government policy aimed at increasing an economy's productive capacity, often through tax cuts or deregulation.

T

Trade Deficit
A situation in which a country's imports exceed its exports in value.

U

Unemployment Rate
The percentage of the labor force that is jobless and actively seeking employment.

V

Velocity of Money
The rate at which money circulates through an economy, calculated as the ratio of nominal GDP to the money supply.

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