Economics Key Concepts: GDP, Interest Rates, and More

Posted on Mar 1, 2025 in Economy

Key Economic Concepts

  • GDP Deflator: The broadest price index, covering all output.
  • Real Interest Rate: The nominal interest rate minus the anticipated rate of inflation.
  • Bracket Creep: The movement of taxpayers into higher tax brackets as nominal incomes grow.
  • Income Changes: If your rent increases from $1,000 to $1,100 over a period of one year and your income rises from $6,000 to $7,000, your nominal income has increased, and your real income has increased.
  • Money Illusion: Experiencing a rise in income and prices by the same percentage but feeling better off.
  • Deflation: During a period of deflation, people on fixed incomes are better off.
  • Gasoline Prices and Income: If the cost of your gasoline purchases decreases from $150 per month to $80 over a period of one year due to lower prices and your income decreases from $1,600 per month to $1,500 per month, your nominal income has decreased, but your real income has increased.
  • Keynesian Levers: Fiscal policy.
  • Keynes’ Beliefs: John Maynard Keynes believed that small disturbances in output, prices, or unemployment were likely to be magnified by the invisible hand of the marketplace.
  • Government Spending: An increase in government spending, ceteris paribus, is represented as a movement from one point to another on a graph.
  • Recession: A decline in total real output for two or more consecutive quarters.
  • Flexible Wages and Prices: If wages and prices are flexible, then a recession is best eliminated when prices and wages both fall.
  • Monetarists: Economists who believe that there is a natural rate of output that is relatively immune to short-run fluctuations in aggregate demand.
  • The Great Depression: Before the year 2000, the most prolonged departure from the long-term growth path for the United States occurred during the Great Depression.
  • US Economy Growth Path: Characterized by stumbles and setbacks.
  • Recession Representation: A recession can be represented by a point inside the production possibilities curve.
  • Wealth Increase: If wealth rises, the AD curve will shift to the right.
  • Inflationary Gap: Most likely occurs when there is a bidding war for available goods and services.
  • Consumer Spending: When consumer spending exceeds disposable income, the MPS is not negative.
  • Consumption Function Shift: If the consumption function shifts, the MPC and APC have increased at each income level.
  • Autonomous Consumption: Depends on factors other than innovation.
  • Keynesian Concerns: Keynes was concerned that at macroeconomic equilibrium the economy would experience neither full employment nor price stability.
  • Consumption Function Slope: The line described by the consumption function C = a + bYD will change its slope when the MPC changes.
  • Recessionary Gap Implication: Aggregate demand is less than aggregate supply at the full-employment price level.
  • Keynesian Recommendation: Higher taxes when there is excess aggregate demand.
  • Desired Stimulus Formula: AD shortfall รท the multiplier.
  • AD Shortfall: The amount of additional aggregate demand needed to achieve full employment after allowing for price level changes.