Macroeconomic Equilibria & Consumer Demand

Abstractions about how aggregate output, prices, and consumer choice settle into equilibrium, spanning macro models like IS-LM and the fiscal multiplier, demand-curve classifications like Engel curves and Giffen goods, and puzzles like the equity premium and Lucas critique.

19 abstractions in this family — domain-specific abstractions that sit near one another in structural-signature space (k-means over structural-signature embeddings). Each is shown with its short description.

• Aggregate Demand — The total planned expenditure on final goods and services at a given price level, summed as C + I + G + (X − M) and matched against aggregate supply to set short-run output and the price level.
• Easterlin Paradox — Reconcile the puzzle that richer people report more happiness at any moment yet national well-being stays flat as real income multiplies over decades — by recognising the cross-sectional gradient reflects relative income against a moving reference, not absolute income.
• Engel curve — Read a good's economic character — normal or inferior, necessity or luxury — off the slope and curvature of a single schedule that plots its consumption against household income while holding all prices fixed.
• Equity premium puzzle — Confront one number against one model — the ~6-point historical equity premium against what a consumption-CAPM with plausible risk aversion can rationalize — and read the order-of-magnitude miss as indicting a load-bearing assumption in an enumerable stack.
• Fiscal Multiplier — Compress a fiscal impulse's whole propagation cascade into one estimable ratio — the change in aggregate output over the change in government spending or taxation — driven by the marginal propensity to consume through induced rounds of income, less leakages and offset channels, and conditioned on regime.
• Giffen Good — A good whose quantity demanded rises as its own price rises — the rare case where a good is inferior and its income effect outweighs its substitution effect, flipping the Marshallian demand curve upward in apparent violation of the law of demand.
• Income Effect — Split a consumer's demand response to a price change into the part driven purely by the shift in real purchasing power — separating it from re-optimization toward cheaper substitutes — so a good's Engel-curve slope classifies it as normal, inferior, or Giffen.
• Income Elasticity of Demand — Collapse a good's whole income-demand relationship into one unit-free ratio of percentage change in quantity to percentage change in income, so its sign and position relative to one classify it as inferior, necessity, or luxury.
• Inferior Good — Classify a good by the sign of its income elasticity: one whose demand falls as income rises (η_Y < 0), because a rising budget lets the consumer shift toward a preferred substitute now within reach — with the Giffen good as its extreme tail.
• IS–LM model — A two-curve diagram fixing short-run equilibrium in a closed economy: the downward IS curve where the goods market clears and the upward LM curve where the money market clears cross at one point (r, Y) that pins down the interest rate and output jointly.
• Kaldor-Hicks Efficiency — Judge a policy efficiency-improving if the gainers could in principle fully compensate the losers and still stay ahead, reducing the whole welfare ledger to the sign of one scalar — aggregate willingness-to-pay minus willingness-to-accept — whether or not compensation is paid.
• Laffer curve — Tax revenue is a non-monotone function of the rate — zero at 0% and zero at 100% — so a mechanical effect raising revenue and a behavioural base-erosion effect eroding it produce an interior revenue-maximising peak at rate 1/(1+e).
• Lucas Critique — Refuse to trust a macroeconometric model's historical coefficients for policy evaluation unless they are deep, regime-invariant parameters, because reduced-form relationships are themselves functions of the policy regime and shift the instant policy shifts.
• Money Illusion — The tendency to respond to nominal monetary figures as if they were real, inflation-adjusted amounts — failing to apply the purchasing-power deflator — so behavior tracks the observed nominal quantity over the real one it should weigh.
• Paradox of Thrift — The macroeconomic result that a simultaneous, economy-wide rise in the desire to save lowers total saving in equilibrium, because the coordinated withdrawal of spending contracts demand and income until realized saving falls.
• Real vs. Nominal Value Distinction — The operation of separating a monetary quantity's real change from the drift in its unit's purchasing power by dividing a nominal series through a price index and rebasing — treating the measuring unit itself as a variable, so cross-time comparisons are not confounded by inflation.
• Ricardian Equivalence — Treat a debt-financed tax cut as a deferred tax of equal present value, so forward-looking households save the windfall to meet the future bill and the financing choice adds no stimulus.
• Risk-Free Rate Puzzle — The asset-pricing anomaly that a CRRA model calibrated to the observed equity premium predicts a real risk-free rate far above the ~1% seen — because the single parameter γ is overloaded as both risk aversion and the inverse elasticity of intertemporal substitution, so fitting one target misfits the other.
• Substitution Effect — Isolate the part of a consumer's demand response to a price change that comes purely from shifted relative prices, holding real purchasing power constant, by hypothetically compensating income and observing how she reallocates toward the now-cheaper goods.