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| Question | Answer |
| Full employment | Occurs when the number of people wishing to work equals the number of workers whom employers wish to hire. |
| Economic growth | The rate of increase in the potential output of an economy. |
| Aggregate demand | Total planned spending on the goods and services produced within the economy in a particular time period. |
| Aggregate supply | The aggregate level of real output that all the firms in the economy plan to produce at different average price levels. |
| Fiscal policy | The use of government spending, taxation and the government's budgetary position to achieve the government's policy objectives. |
| Unemployment | Occurs when people who are actively searching for employment are unable to find work. |
| Inflation | A continuous and persistent rise in the price level and a fall in the value of money |
| Macroeconomic policy | Government policy aimed at achieving macroeconomic objectives such as a satisfactory and sustainable rate of economic growth, full employment, control of inflation and a satisfactory balance of payments. |
| Monetarist | An economist who argues that a prior increase in the money supply is always the cause of inflation. |
| Money supply | The stock of money in the economy at a particular point in time. |
| Supply-side policies | Government economic policies which aim to make markets more competitive and efficient, increase production potential, and shift the LRAS curve to the right. |
| Recession | 6 months or more of negative economic growth or declining real national output. |
| Monetary policy | Implemented by the government and the central bank to achieve policy objectives using monetary instruments. |
| Bank Rate | The interest rate set by the Bank of England which it uses as a benchmark for setting the interest rates that it charges when lending to other financial institutions. |
| Quantitative Easing / Asset Purchase Scheme | An unconventional form of monetary policy whereby the central bank creates new money electronically, which is then used to buy financial assets on the country's financial markets. |
| Budget deficit | The amount by which government spending exceeds government revenue in a particular time period. |
| Budget surplus | The amount by which government spending is less than government revenue in a particular time period. |
| National debt | The amount of accumulated debt, resulting from past government borrowing, that is owed by the UK government. Stock of debt owed to both UK and foreign institutions. |
| Balancing the budget | Setting government spending equal to government revenue. |
| Circular flow of income | In the economy, income received by households from selling labour and other factor services to firms circulates back to the firms when spent by households on goods and services produced by the firms. |
| Macroeconomic equilibrium | Occurs in a circular flow diagram when injections equals withdrawals. Also seen on AD/AS diagram where AD=AS. |
| Injections | Investment spending by firms on capital goods, government spending, overseas spending on the economy's exports are injections. |
| Withdrawals | Saving, tax revenues and spending imports are withdrawals. |
| Cyclical unemployment | Unemployment occurring in the downswing of the economic cycle, caused by a lack of AD in the economy. AKA Keynesian or demand-deficient unemployment. |
| Multiplier | The relationship between an initial change in aggregate demand and the resulting usually larger change in national income. |
| Gross Domestic Product | The sum of all goods and services, or the value of output, produced in the economy over a period of time. |
| Short-run aggregate supply | The quantities of real output that businesses plan to produce and sell at different price levels when total productive capacity is fixed but when variable factors of production can be changed. |
| Exchange rate | The external price of a currency, usually measured against another currency such as USD or EUR. |
| Long-run aggregate supply | The real output that can be supplied when the economy is on its production possibility frontier. This is when all the available factors of production are employed and producing at their normal capacity level of output. |
| Disinflation | A fall in the rate of inflation, but inflation remains positive. |
| Output gap | The difference between the current level of real GDP and the potential output of the economy. |
| Positive output gap | Occurs when the current level of real GDP is above the potential output of the economy. |
| Negative output gap | Occurs when the current level of real GDP is below the potential output of the economy. |
| Short-run economic growth | Occurs when an increase in aggregate demand brings spare capacity into production. |
| Long-run economic growth | Occurs when the productive capacity of the economy is increasing. It is used to refer to the trend rate of growth. |
| Frictional unemployment | Short-term transitional unemployment. |
| Structural unemployment | Occurs when certain industries decline because of long term changes in market conditions. Not caused by lack of AD but changes in pattern of demand and technology. |
| Real wages | Wages that have been adjusted for inflation, in contrast to a nominal wage which is purely the money value. Measures the amount of goods and services that can be bought. |
| Real-wage unemployment | A type of disequilibrium unemployment caused by real wage rates being too high to clear the labour market, resulting in excess supply of labour. |
| Deflation | A persistent tendency for the price level to fall and for the value of money to rise. |
| Quantity theory of money | Theory that assumes inflation is caused by a prior increase in the money supply. |
| Demand-pull inflation | A rising price level caused by an increase in AD. |
| Fisher equation of exchange | MV=PQ. The stock of money in the economy multiplied by the velocity of circulation of money equals the price level multiplied by the quantity of real output in the economy. |
| Cost-push inflation | A rising price level caused by an increase in the costs of production. |
| Phillips curve | A curve showing the apparent relationship between the rate of inflation and the rate of unemployment. |
| Short-run Phillips curve | The original downward sloping curve, developed by A.W. Phillips. |
| Long-run Phillips curve | A vertical curve, developed by Milton Friedman and Edmund Phelps, along which tradeoffs between reducing inflation and reducing unemployment are not possible. |
| Natural rate of unemployment | The rate of unemployment when the aggregate labour market is in equilibrium. All unemployment is therefore voluntary. |
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