Macro & Economy

85 Macro & Economy terms, defined in plain English — part of the 1345-term Finicade finance glossary. Each one has its own page, and links to the free game that teaches it.

Adverse Selection: Adverse selection is what happens when the party with better information self-selects into a deal — the sickest buy insurance, the worst cars are for sale.
Aggregate Demand: Aggregate demand is total spending in an economy: consumption, investment, government spending and net exports.
Aggregate Supply: Aggregate supply is what an economy can produce at each price level, constrained by labour, capital and technology.
Austerity: Austerity is cutting government spending or raising taxes to shrink a deficit.
Automatic Stabilizers: Automatic stabilizers are parts of the budget that cushion the cycle with no new legislation: benefits rise and tax receipts fall in a downturn.
Balance of Payments: The full ledger of a country's transactions with the rest of the world — trade, income and financial flows.
Bank Leverage: How much a bank lends and invests relative to its own capital.
Bank Run: A bank run is depositors withdrawing en masse because they fear others will withdraw first — a fear that is self-fulfilling, since no bank holds that much cash.
Breakeven Inflation: Breakeven inflation is the gap between a nominal bond yield and an inflation-linked yield of the same maturity — the market real-time inflation expectation.
Budget Deficit: When a government spends more than it collects in a year, borrowing to cover the gap.
Business Cycle: The economy's recurring rhythm of expansion and contraction — boom, slowdown, recession, recovery, repeat.
Central Bank: The institution that runs a country's money — setting the base interest rate, managing the money supply and backstopping the banking system.
Comparative Advantage: The idea that everyone gains from trade if each specialises in what they give up least to produce — even a country that's worse at everything.
Consumer Price Index (CPI): The most-watched inflation gauge: the price of a fixed basket of everyday goods and services, tracked over time.
Core Inflation: Inflation excluding volatile food and energy prices — a steadier read on the underlying trend central banks actually target.
Crowding Out: Crowding out is government borrowing pushing up interest rates and displacing private investment.
Current Account: A country's trade balance plus its net income from abroad — broadly, whether it earns more from the world than it spends.
Deflation: Falling prices across the economy — the opposite of inflation, and often more dangerous.
Devaluation: A fall in a currency's value against others — deliberate under a fixed regime, or market-driven under a floating one.
Diminishing Returns: Diminishing returns is the principle that adding more of one input while holding others fixed eventually produces smaller and smaller gains.
Discount Window: The discount window is the central bank's direct lending facility for banks that need cash against collateral — the lender of last resort in practice.
Economies of Scale: Economies of scale exist when cost per unit falls as output rises, because fixed costs spread over more units and large operations buy more cheaply.
Exchange Rate: The price of one currency in terms of another — how many dollars a euro buys today.
Externality: An externality is a cost or benefit imposed on someone who wasn't party to the transaction — factory pollution, vaccination, a neighbour's renovation.
Federal Funds Rate: The federal funds rate is the overnight rate at which US banks lend reserves to each other, and the Fed's primary policy lever.
Federal Reserve: The Federal Reserve is the US central bank, with a dual mandate for maximum employment and stable prices — unusual among inflation-targeting peers.
Fiscal Multiplier: The fiscal multiplier is how much GDP changes per unit of government spending or tax change, once the money recirculates through the economy.
Fiscal Policy: The government's side of the steering wheel: taxing and spending to speed up or slow down the economy.
Fisher Equation: The Fisher equation states that the nominal interest rate is roughly the real rate plus expected inflation.
FOMC: The FOMC is the twelve-member committee that sets US monetary policy, meeting eight times a year.
Forward Guidance: A central bank steering the economy with words — signalling where rates are headed — so markets adjust today.
Game Theory: Game theory studies decisions where your best move depends on what others do.
GDP (Gross Domestic Product): The total value of everything an economy produces in a year — the standard scorecard for its size and growth.
Gini Coefficient: The Gini coefficient summarises inequality in a single number from 0 (everyone equal) to 1 (one person has everything).
Government Debt: The total a government owes from years of borrowing — usually judged against the size of its economy (debt-to-GDP).
Helicopter Money: Helicopter money is permanent money creation handed directly to households or governments, rather than lent into the system and expected back.
Hyperinflation: Inflation gone out of control — prices doubling in days, money worthless by the week.
Inflation: The general rise in prices that quietly shrinks what your money buys.
Interest Rate Parity: Interest rate parity is the no-arbitrage link between two countries' interest rates and their exchange rate: higher rates imply an expected depreciation.
IS-LM Model: The IS-LM model plots where goods markets clear (IS) and money markets clear (LM), their intersection giving short-run equilibrium output and rates.
Keynesian Economics: Keynesian economics holds that demand can fall short of supply for long periods because prices and wages are sticky, so government should act.
Labor Force Participation Rate: The participation rate is the share of the working-age population either employed or actively looking for work.
Laffer Curve: The Laffer curve observes that tax revenue is zero at a 0% rate and zero again at 100%, so somewhere between them revenue peaks.
Liquidity Trap: When interest rates are near zero and cutting them further does nothing — people hoard cash instead of spending.
Marginal Utility: Marginal utility is the extra satisfaction from one more unit of something, and it almost always falls as you consume more.
Modern Monetary Theory (MMT): MMT argues a government issuing debt in its own currency cannot be forced to default, so the real constraint on spending is inflation, not the deficit.
Monetarism: Monetarism argues that inflation is caused by money supply growth outpacing output, so central banks should target steady money growth.
Monetary Policy: How a central bank steers the economy by moving interest rates and the money supply — cutting rates to stimulate, raising them to cool inflation.
Money Demand: How much cash people and firms want to hold rather than invest — rising when they value liquidity, falling when interest rates make holding cash costly.
Money Supply: The total money circulating in an economy — cash plus deposits.
Moral Hazard: Moral hazard is the change in behaviour that follows being protected from consequences: insured drivers take more risk, rescued banks lend more freely.
NAIRU: The non-accelerating-inflation rate of unemployment — the lowest joblessness can go before inflation starts climbing.
Nash Equilibrium: A Nash equilibrium is a set of strategies where nobody can do better by changing their own move alone.
Negative Interest Rates: Negative interest rates mean depositors pay to keep money rather than earning on it — a policy used to force lending and weaken a currency.
Neutral Rate: The interest rate that neither heats up nor cools down the economy — the resting level policy gravitates toward.
Okun's Law: The rough rule that when output grows faster than usual, unemployment falls — and vice versa.
Opportunity Cost: Opportunity cost is the value of the best thing you gave up to do what you did.
Output Gap: The gap between what an economy is producing and what it could produce at full stretch.
Paradox of Thrift: The twist where everyone saving more at once shrinks the economy — less spending means less income, so total saving may not even rise.
Phillips Curve: The observed trade-off between unemployment and inflation: push unemployment very low and inflation tends to rise.
Price Elasticity of Demand: Price elasticity of demand measures how much quantity demanded changes when price changes.
Producer Price Index (PPI): The PPI measures prices received by domestic producers — inflation at the factory gate rather than the checkout.
Productivity: Productivity is output per unit of input, usually per hour worked, and it is the only sustainable source of rising living standards.
Public Good: A public good is non-rival and non-excludable: one person's use doesn't reduce another's, and nobody can practically be kept out.
Purchasing Power Parity (PPP): The idea that exchange rates should drift toward levels where a basket of goods costs the same everywhere — the theory behind the Big Mac index.
Quantitative Easing: A central bank creating new money to buy bonds, pushing rates down and cash into the system when normal rate cuts have hit zero.
Quantity Theory of Money: The quantity theory holds that money supply times velocity equals price level times output, so money growth translates into inflation.
Real vs Nominal: Nominal figures are in today's money; real figures strip out inflation to compare across time.
Recession: A broad, sustained fall in economic activity — output, jobs and spending all shrinking together, loosely two quarters of falling GDP.
Reserve Currency: A reserve currency is one central banks hold in their foreign exchange reserves and that global trade and debt are priced in — overwhelmingly the US dollar.
Reserve Requirement: A reserve requirement is the fraction of deposits a bank must hold rather than lend.
Ricardian Equivalence: The theory that people see today's deficit as tomorrow's tax bill, so they save the windfall and government stimulus has no effect.
Seigniorage: The profit a government makes from creating money — the gap between a note's face value and the near-zero cost of issuing it.
Soft Landing: A soft landing is a central bank slowing an overheating economy enough to bring inflation down without causing a recession.
Solow Growth Model: The Solow model explains long-run growth through capital, labour and technology, and finds that only technological progress raises growth permanently.
Stagflation: The nasty combination of stagnant growth and high inflation — the Phillips-curve trade-off breaking down so both problems hit at once.
Supply and Demand: The tug-of-war that sets prices: buyers want more when it's cheap, sellers offer more when it's dear, and the price settles where the two balance.
Tapering: Tapering is slowing the pace of central bank asset purchases — still buying, just less.
Tariff: A tariff is a tax on imports, raising their price to protect domestic producers or raise revenue.
Taylor Rule: A formula for where a central bank should set interest rates, given inflation and the output gap.
Term Premium: The term premium is the extra yield investors demand for holding long bonds instead of rolling short ones — compensation for bearing rate uncertainty.
Trade Deficit: A trade deficit means a country imports more goods and services than it exports.
Unemployment Rate: The share of people who want work and are looking but can't find it.
Velocity of Money: Velocity is how many times a unit of currency is spent in a year — nominal GDP divided by the money supply.
Yield Curve Control: Yield curve control targets a specific yield at a chosen maturity, with the central bank pledging to buy however many bonds it takes to hold the line.

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