Macro Economy

The recurring pattern of expansion and contraction in economic activity, consisting of four phases: expansion, peak, contraction (recession), and trough. Cycles vary in length and intensity, with expansion phases typically lasting longer than contraction phases.

Example: During the 2008-2009 contraction, unemployment peaked near 10% in October 2009, a few months after t...

Economic indicators that move simultaneously with the overall economy, reflecting current economic conditions in real time. The Conference Board tracks four primary coincident indicators: industrial production, nonagricultural employment, personal income (minus transfer payments), and manufacturing & trade sales. These indicators confirm the current state of the economy without predicting future conditions or lagging behind changes.

Example: During a recession, industrial production (a coincident indicator) declines at the same time that no...

A sustained decrease in the general price level of goods and services over time, resulting in a negative inflation rate and increased purchasing power of money. Typically measured by a declining Consumer Price Index (CPI). Deflation often signals economic weakness as falling prices discourage consumption and can lead to deflationary spirals.

Example: During the Great Depression (1929-1933), the U.S. experienced severe deflation with prices falling a...

The target interest rate range set by the Federal Open Market Committee (FOMC) for overnight lending of reserve balances between banks and other depository institutions. The actual rate is market-determined through interbank transactions. The FOMC's target range for it is the main operating target of U.S. monetary policy, and it influences other interest rates throughout the economy. The FOMC holds eight regularly scheduled meetings per year to set the target range, typically adjusted in increments of 25 basis points (0.25%).

Example: In March 2022, the FOMC raised the target range for the federal funds rate from 0%-0.25% to 0.25%-0....

A financial statement showing the Federal Reserve's assets (primarily Treasury securities and mortgage-backed securities purchased through open market operations) and liabilities (primarily currency in circulation and bank reserves). The size of the balance sheet expands during quantitative easing (QE) when the Fed purchases securities to inject money into the economy, and contracts during quantitative tightening (QT) when the Fed allows securities to mature without replacement. The balance sheet grew from approximately $900 billion in 2007 to over $8 trillion by 2022 following multiple rounds of QE.

Example: During and after the 2008 financial crisis (from late 2008 through October 2014), the Fed dramatical...

Government decisions about taxation and spending used to influence economic conditions. Controlled by Congress and the President, not the Federal Reserve. Expansionary fiscal policy increases spending or cuts taxes to stimulate growth; contractionary policy decreases spending or raises taxes to slow inflation.

Example: During the 2008 recession, Congress passed an economic stimulus package with tax rebates (expansiona...

The total monetary value of all goods and services produced within a country's borders during a specific period, typically measured quarterly or annually. Calculated as C + I + G + (X - M), where C = consumption, I = investment, G = government spending, X = exports, M = imports. Two consecutive quarters of declining real GDP defines a recession.

Example: If nominal GDP is $25 trillion and grows to $26 trillion the next year while inflation is 4%, real G...

A sustained increase in the general price level of goods and services over time, reducing the purchasing power of money. Most commonly measured by the Consumer Price Index (CPI) in the United States. Inflation erodes the real value of fixed-income payments and cash holdings.

Example: If inflation is 3% annually, $100 today will only buy approximately $97 worth of goods in one year, ...

Economic metrics that confirm trends and changes in the economy after they have already occurred, often months later. Exam courses commonly name the unemployment rate and corporate profits as lagging indicators, although the Lagging Economic Index published by the Conference Board includes neither; its components include the average duration of unemployment, labor cost per unit of output, the average prime rate, and the CPI for services. Because their turning points generally come after those in overall economic activity, they are used to confirm economic turning points rather than to predict them.

Example: During the 2008-2009 financial crisis, the recession began in December 2007, but the unemployment ra...

Economic indicators that typically change direction before the overall economy, helping predict future economic activity in the months ahead. Common leading indicators include stock market performance, building permits, new manufacturing orders, consumer confidence, yield curve, and initial jobless claims. Not perfectly accurate; false signals can occur.

Example: When building permits and new housing starts decline sharply, this often signals an economic contrac...

Actions by the Federal Reserve (central bank) to control money supply and interest rates to influence economic activity. Implemented through tools that include open market operations (a key tool), interest on reserve balances, the discount rate, and reserve requirements (rarely changed; the Fed reduced reserve requirement ratios to zero percent effective March 26, 2020).

Example: When the Fed sells Treasury securities to reduce money supply and raise interest rates, this is cont...

The interest rate commercial banks charge their most creditworthy corporate customers, serving as a benchmark for consumer and business loan rates including credit cards, mortgages, home equity lines of credit, and auto loans. Typically set approximately 3% above the federal funds rate. Individual banks set their own prime rates, though most major banks use the same rate published as the Wall Street Journal Prime Rate.

Example: When the Federal Reserve raises the federal funds rate by 0.25%, most banks raise their prime rate b...

A monetary policy tool in which the Federal Reserve buys large amounts of longer-term securities (mainly Treasuries and mortgage-backed securities) to lower long-term rates, typically when short-term rates are near zero. This unconventional tool expands the Fed's balance sheet, injects liquidity, and aims to stimulate economic activity by reducing borrowing costs and encouraging lending and investment.

Example: During the 2008 financial crisis, the Fed launched QE1 in November 2008 and, after cutting the feder...

A significant decline in economic activity spread across the economy, lasting more than a few months. Technically defined as two consecutive quarters of negative real GDP growth. Characterized by rising unemployment, falling consumer spending, declining business investment, and reduced corporate profits.

Example: During the 2008-2009 recession, real GDP declined for four consecutive quarters (Q3 2008 through Q2 ...

A rare and challenging economic condition characterized by the simultaneous occurrence of stagnant economic growth (or recession), high inflation, and high unemployment. Stagflation contradicts the traditional Phillips Curve relationship, which suggests inflation and unemployment move in opposite directions. This condition creates a policy dilemma because measures to reduce inflation (tightening monetary policy) typically worsen unemployment, while measures to stimulate growth (loosening policy) worsen inflation.

Example: The 1970s oil crisis produced classic stagflation in the United States: GDP growth stalled near 0% (...

The percentage of the labor force that is unemployed: people without a job who are available for work and made a specific effort to find one in the past 4 weeks, plus people on temporary layoff expecting recall. Calculated monthly by the Bureau of Labor Statistics (BLS). Excludes discouraged workers who have stopped looking for employment. A key lagging economic indicator used to assess economic health and inform Federal Reserve policy decisions.

Example: The 2007-2009 recession ended in June 2009, but the unemployment rate kept rising and peaked at 10% ...

A graph plotting the yields of bonds of equal credit quality across different maturities, most commonly drawn with U.S. Treasury securities. Its shape reflects market expectations for interest rates, inflation, and economic growth: a normal (upward-sloping) curve shows long-term yields above short-term yields and signals expected expansion, while an inverted (downward-sloping) curve shows short-term yields above long-term yields and historically precedes recessions.

Example: From mid-2006 into the spring of 2007 the U.S. Treasury yield curve was inverted: the 3-month T-bill...