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Definitions are extremely important for all essay response questions and is tested under the Learning Objective "Relevant economic terms are used appropriately throughout the response"

Below is a list of definitions pertaining to macroeconomic topics that are frequently tested. This is not a comprehensive list and if you feel that we have left out any important definitions please do not hesitate to suggest it using the "Contact Us" form. 

HL and SL 

Expenditure Approach (GDP)

Adds up all spending to buy final goods and services produced within a country over a time period

Income Approach (GDP)

Adds all the income earned by the factors of production that produce all goods and services within a country over a time period

Output Approach (GDP)

he value of all final goods and services produced in a country over a time period

Gross Domestic Product

Final market value of all goods and services produced in a country over a time period

Gross National Income

Income earned by residents of a country regardless of their physical location

Nominal Values

Value measured in terms of price prevailing at the time

Real Values

Measure of value that takes into account changes in price over time

Per capita

Values that take into account the population

Purchasing Power Parity

Buying power equivalence

Business Cycle

Short term fluctuations in the growth of real output which are alternating in periods of expansion and contraction

Potential Growth

Output represented by the long term growth trend

Happiness Index

An index that is concerned with personal happiness

Happy Planet Index

An index that is concerned with planets wellbeing

Aggregate Demand

The total amount of real GDP that consumers, firms, the government and foreigners want to buy at each possible price level over a time period

Short run

Period of time when price of resources are roughly constant in spite of changes in price levels

Long run

Period of time in which the price of all resources are flexible and change with changes in price level

Aggregate Supply

Total quantity of goods and services produced in an economy over a particular time period at different price levels


People of working age who are actively looking for a job but are unable to find one


People of working age that are employed but not making full use of their skills

Structural unemployment

Unemployment due to change in demand for certain type of labor skills

Frictional Unemployment

Unemployment arising from individuals who are between jobs

Seasonal Unemployment

Unemployment due to change in demand for labor in certain industries on seasonal basis

Cyclical Unemployment

Unemployment caused by a deficiency in aggregate demand


A sustained increase in the general price level of goods and services


A sustained decrease in the general price level of goods and services

Consumer Price Index (CPI)

Measure of cost of living for typical household

Demand pull inflation

Inflation caused by excess aggregate demand

Cost push inflation

Inflation caused by a fall in aggregate supply

Economic growth

Increase in real GDP

Economic Inequality

Degree that people in a population differ in their ability to satisfy their economic needs

Lorenz curve

Curve that is used to depict the level of income inequality in an economy


An inability to satisfy minimum consumption needs

Absolute poverty

A situation in which a person or family does not have enough income to meet basic human needs

Relative poverty

comparison of the income of individuals or households in a society to a the median income

Direct tax

Tax paid directly to the government tax authorities by the tax payer

Proportional Tax

There is a constant increase in the tax with income

Progressive tax

There is a more than proportionate increase in tax with income

Regressive tax

There is a less that proportionate increase in tax with income

Monetary Policy

Policy undertaken by central bank to influence aggregate demand

Nominal Interest Rates

Interest rate that prevails at that given time

Real Interest Rate

Interest rate adjusted for inflation

Expansionary Monetary Policy

Increase in money supply by central bank to increase aggregate demand

Contractionary Monetary Policy

Decrease in money supply by central bank to decrease aggregate demand

Ratchet Effect

In Keynesian model price level only increases but does not decrease due to sticky wages in downward direction

Fiscal Policy

Manipulation by the government of its own expenditure and taxes to influence the level of aggregate demand

Expansionary Fiscal Policy

Increase in the government expenditure or reduction in taxes to increase the level of aggregate demand

Contractionary Fiscal Policy

Decrease in the government expenditure or increase in taxes to decrease the level of aggregate demand

HL Only

Government debt

The amount of money that a government owes to lenders outside of the government itself

Sustainable debt

Level of debt where the borrowing government has enough revenue to meet its debt obligation

Marginal tax rate

Tax paid on additional income

Average tax rate

Tax paid divided by total income

Minimum reserve requirement

The minimum amount of money that the bank is required to legally store

Crowding out

If government is forced to borrow their is an increase in the demand for money leading to an increase in the rate of interest and therefore reducing private investment.

Automatic Stabilizers

Factors that stabilize the short term fluctuations with very little government intervention

Keynesian Multiplier

The ratio of real GDP divided by a change in any of the components of aggregate spending

Marginal Propensity to Consume

Fraction of additional income that household spend on consumption of domestically produced goods and services

Marginal Propensity to Save

Fraction of additional income saved

Marginal Propensity to Tax

Fraction of additional income taxed

Marginal Propensity to Import

Fraction of additional income spent on imported goods and services

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