Macroeconomics/Glossary

Macroeconomics

Contents - Glossary

Economics

Market Economics

Supply and Demand

Why Macroeconomics

Measuring Domestic Output

Open Economies

Business Cycle

Aggregate Expenditures

Aggregate Supply and Demand

Fiscal Policy

Money

Monetary Policy

Government Finances

A

• Absolute Advantage - the advantage conferred on an individual in an activity if he or she can do it better than other people.
• Absolute Value - the value of a number without regard to a plus or minus sign.
• Accelerator Principle - the proposition that a higher rate of growth in real GDP results in a higher level of investment spending, and a lower growth rate in real GDP leads to lower planned investment spending.
• Actual Investment Spending - the sum of planned investment spending and unplanned investment spending.
• AD-AS model - the basic model used to understand fluctuation in aggregate output and the aggregate price level. It uses the aggregate supply curve and the aggregate demand curve together to analyze the behavior of the economy in response to shocks of government policy.
• Aggregate Consumption Function - the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending.
• Aggregate Demand Curve - a graphical representation that shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, firms, the government and the rest of the world. The aggregate demand curve has a negative slope due to the wealth effect of a change in the aggregate price level and the interest rate effect of a change in the aggregate price level.
• Aggregate Output - the total quantity of final goods and services the economy produces for a given time period, usually a year. Real GDP is the numerical measure of aggregate output typically used by economists.
• Aggregate Price Level - a single number that represents the overall price level for final goods and services in the economy.
• Aggregate Production Function - a hypothetical function that shows how productivity (real GDP per worker) depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology.
• Aggregate Spending - the total flow of funds into markets for domestically produced final goods and services; the sum of consumer spending, investment spending, government purchases of goods and services, and exports minus imports.
• Aggregate Supply Curve - a graphical representation that shows the relationship between the aggregate price level and the total quantity of aggregate output supplied.
• Appreciation - a rise in the value of one currency in terms of other currencies.
• Autarky - a situation in which a country does not trade with other countries.
• Automatic Stabilizers - government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands without requiring any deliberate actions by policy makers. Taxes that depend on disposable income are the most important example of automatic stabilizers.
• Autonomous Change in Aggregate Spending - an initial rise or fall in aggregate spending at a given level of real GDP.
• Average Rate of Tax (ART) - an individual or company’s taxes divided by its taxable income.

B

• Balance of Payments Accounts - a summary of a country's transactions with other countries, including two main elements: the balance of payments on current account and the balance of payments on financial account.
• Balance of Payments on Current Account - transactions that don't create liabilities; a country's balance of payments on goods and services plus net international transfer payments and factor income.
• Balance of Payments on Financial Account - international transactions that involve the sale or purchase of assets, and therefore create future liabilities.
• Balance of Payments on Goods and Services - the difference between the value of exports and the value of imports during a given period.
• Balance Sheet Effects - the reduction in a firm's net worth from falling asset prices.
• Bank - a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investments or investment spending needs of borrowers.
• Bank Deposit - a claim on a bank that obliges the bank to give the depositor his or her cash when demanded.
• Bank Reserves - currency held by banks in their vaults plus their deposits at the Federal Reserve.
• Bank Run - a phenomenon in which many of a bank's depositors try to withdraw their funds due to fears of a bank failure.
• Bar Graph - a graph that uses bars of varying height of length to show the comparative sizes of different observations of a variable.
• Barter - a transaction in which people directly exchange goods or services that they have for goods and services that they want.
• Black Market - a market in which goods or services are bought and sold illegally, either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling.
• Bond - a legal document based on borrowing in the form of an IOU that pays interest.
• Budget Balance - the difference between tax revenue and government spending. A positive budget balance is referred to as a budget surplus; a negative budget is referred to as a budget deficit.
• Budget Deficit - the difference between tax revenue and government spending when government spending exceeds tax revenue; dissaving by the government in the form of a budget deficit is a negative contribution to national savings.
• Budget Surplus - the difference between tax revenue and government spending when tax revenue exceeds government spending; saving by the government in the form of a budget surplus is a positive contribution to national savings.
• Business Cycle - the short-run alternative between economic downturns, known as recessions, and economic upturns, known as expansions.
• Business-Cycle Peak - the point in time at which the economy shifts from expansion to recession.
• Business-Cycle Trough - the point in time at which the economy shifts from recession to expansion.

C

• Capital Inflow - the net inflow of funds into a country; the difference between the total inflow of foreign funds to the home country and the total outflow of domestic funds to other countries. A positive net capital inflow represents funds borrowed from foreigners to finance domestic investment; a negative net capital inflow represents funds lent to foreigners to finance foreign investment.
• Causal Relationship - the relationship between two variables in which the value taken by one variable directly influences or determines the value taken by the other variable.
• Central Bank - an institution that oversees and regulates the banking system and controls the monetary base.
• Chained Dollars - method of calculating real GDP that splits the difference between growth rates calculated using early base years amd the growth rates calculated using late base years.
• Checkable Bank Deposits - bank accounts on which people can write checks.
• Circular-Flow Diagram - a diagram that represents the transactions in an economy by two kinds of flows around a circle: flows of physical things such as goods or labor in one direction and flows of money to pay for these physical things in the opposite direction.
• Classical Model of the Price Level - a simplified financial model of the price level in which the real quantity of money, M/P, is always at its long-run equilibrium level. This model ignores the distinction between the short run and the long run but is useful for analyzing the case of high inflation.
• Commercial Bank - a bank that accepts deposits and is covered by deposit insurance.
• Commodity Money - a medium of exchange that is a good, normally gold or silver, that has intrinsic value in other uses.
• Commodity-Backed Money - a medium of exchange that has no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods on demand.
• Comparative Advantage - the advantage conferred on an individual or nation in producing a good or service if the opportunity cost of producing the good or service is lower for that individual or nation than other producers.
• Competitive Market - a market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold.
• Complements - pairs of goods for which a rise in the price on one good leads to a decrease in the demand for the other good.
• Consumer Price Index (CPI) - a measure of prices; calculated by surveying market prices for a market basket intended to represent the consumption of a typical urban American family of four. The CPI is the most commonly used measure of prices in the United States.
• Consumer Spending - household spending on goods and services from domestic and foreign firms.
• Consumer Surplus - a term often used to refer both to individual consumer surplus and to total consumer surplus.
• Consumption Function - an equation showing how an individual household's consumer spending varies with the household's current disposable income.
• Contractionary Fiscal Policy - fiscal policy that reduces aggregate demand by decreasing government purchases, increasing taxes, or decreasing transfers.
• Contractionary Monetary Policy - monetary policy that, through the raising of the interest rate, reduces aggregate demand and therefore output.
• Convergence Hypothesis - a principle of economic growth that holds that international differences in real GDP per capita tend to narrow over time because countries that start with lower real GDP per capita tend to have highet growth rates.
• Cost - (of potential seller) the lowest price at which a seller is willing to sell a good.
• Crowding Out - the negative effect of budget deficits on private investment, which occurs because government borrowing drives up interest rates.
• Currency in Circulation - actual cash held by the public
• Current Account (Balance of Payments on Current Account) - transactions that don't create liabilities; a country's balance of payments on goods and services plus net international transfer payments and factor income.
• Curve - a line on a graph, which may be curved or straight, that depicts a relationship between two variables.
• Cyclical Unemployment - the difference between the actual rate of unemployment and the natural rate of unemployment.
• Cyclically Adjusted Budget Balance - an estimate of what the budget balance would be if real GDP were exactly equal to potential output.

D

• Debt Deflation - the reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation; occurs because borrowers, whose real debt rises as a result of deflation, are likely to cut spending sharply, and lenders, whose real assets are now more valuable, are less likely to increase spending.
• Debt-GDP Ratio - government debt as a percentage of GDP, frequently used as a measure of a government's ability to pay its debts.
• Default - the risk that the bond issuer fails to make payments as specified by the bond contract.
• Deflation - a fall in the overall level of prices.
• Demand Curve - a graphical representation of the demand schedule, showing the relationship between quantity demanded and price.
• Demand Price - the price of a given quantity at which consumers will demand that quantity.
• Demand Schedule - a list or table showing how much of a good or service consumers will want to buy at different prices.
• Demand Shock - an event that shifts the aggregate demand curve. A positive demand shock is associated with higher demand for aggregate output at any price level and shifts the curve to the right. A negative demand shock is associated with lower demand for aggregate output at any price level and shifts the curve to the left.
• Dependent Variable - the determined variable in a casual relationship.
• Deposit Insurance - a guarantee that a bank's depositors will be paid even if the bank can't come up with the funds, up to a maximum amount per account.
• Depreciation - a fall in the value of one currency in terms of other currencies.
• Devaluation - a reduction in the value of a currency that is set under a fixed exchange rate regime.
• Diminishing Returns to Physical Capital - in an aggregate production function when the amount of human capital per worker and the state of technology are held fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity.
• Discount Rate - the rate of interest the Federal Reserve charges on loans to banks that fall short of reserve requirements.
• Discount Windows - a protection against bank runs in which the Federal Reserve stands ready to lend to banks in trouble.
• Discouraged Workers - individuals who want to work but who have stated to government researchers that they aren't currently searching for a job because they see little prospect of finding one given the state of the job market.
• Discretionary Fiscal Policy - fiscal policy that is the direct result of deliberate actions by policy makers rather than rules.
• Discretionary Monetary Policy - policy actions, either changes in interest rates or changes in the money supply, undertaken by the central bank based on it assessment of the state of the economy.
• Disinflation - the process of bringing down inflation that has become embedded in expectations.
• Disposable Income - income plus government transfers minues taxes; the total amount of household income available to spend on consumption and saving.
• Diversification - investment in several different assets with unrelated, or independent, risks, so that the possible losses are independent events.
• Domestic Demand Curve - a demand curve that shows how the quantity of a good demanded by domestic consumers depends on the price of that good.
• Domestic Supply Curve - a supply curve that shows how the quantity of a good supplied by domestic producers depends on the price of that good.

E

• Economic Growth - the growing ability of the economy to produce goods and services
• Economics - the social science that studies the production, distribution, abd consumption of goods and services.
• Economy - a system for coordinating society's productive activities.
• Efficiency Wages - wages that employers set above the equilibrium wage rate as an incentive for workers to deliver better performance.
• Efficient - describes a market or economy that takes all opportunities to make some people better off without making other people worse off.
• Efficient Market Hypothesis - a principle of asset price determination that holds that asset prices emobdy all publicly available information. The hypothesis implies that stock prices should be unpredictable, or follow a random walk, since changes should occur only in response to new information about fundamentals.
• Employment - the total number of people currently employed for pay in the economy, either full-time or part-time.
• Equilibrium - an economic situation in which no individual would be better off doing something different.
• Equilibrium Exchange Rate - the exchange rate, at which the quantity of a currency demanded in the foreign exchange market is equal to the quantity supplied.
• Equilibrium Price - the price at which the market is in equilibrium, that is, the quantity of a good or service demanded equals the quantity of that good or service supplied; also referred to as the market-clearing price.
• Equilibrium Quantity - the quantity of a good or service bought and sold at the equilibrium (or market-clearing) price.
• Equity - fairness; everyone gets his or her fair share. Since people can disagree about what's "fair," equity isn't as well defined a concept as efficiency.
• European Union (EU) - a customs union among 27 European nations.
• Excess Reserves - a bank's reserves over and above the reserves required by law or regulation.
• Exchange Market Intervention - government purchases above the reserves required by law or regulation.
• Exchange Rate - the price at which currencies trade, determined by the foreign exchange market.
• Exchange Rate Regime - a rule governing policy toward the exchange rate.
• Expansion - period of economic upturn in which output and employment are rising; most economic numbers are following their normal upward trend; also referred to as a recovery.
• Expansionary Fiscal Policy - fiscal policy that increases aggregate demand by increasing government purchases, decreasing taxes, or increasing transfers.
• Expansionary Monetary Policy - monetary policy that, through lowering of the interest rate, increases aggregate demand and therefore output.
• Exporting Industries - industries that produce goods or services that are sold abroad.
• Exports - goods and services sold to other countries.

F

• Factor Intensity - the difference in the ratio of factors used to produce a good in various industries. For example, oil refining is capital-intensive compared to clothing manufacture because oil refiners use a higher ratio of capital to labor than do clothing producers.
• Factor Markets - markets in which firms buy the resources they need to produce goods and services.
• Factor of Production - the resources used to produce goods and services. Labor and capital are examples of factors.
• Federal Funds Market - the financial market that allows banks that fall short of reserve requirements to borrow funds from banks with excess reserves.
• Fiat Money - a medium of exchange whose value derives entirely from its official status as a means of payment.
• Final Good and Services - goods and services sold to the final, or end, user.
• Financial Account (Balance of Payments on Financial Account) - international transactions that involve the sale of purchase of assets, and therefore create future liabilities.
• Financial Asset - a paper claim that entitles the buyer to future income from the seller. Loans, stocks, bonds and bank deposits are types of financial assets.
• Financial Intermediary - an institution, such as a mutual fund, pension fund, life insurance company or bank, that transforms the funds it gathers from many individuals into financial assets.
• Financial Markets - the banking, stock, and bond markets, which channel private savings and foreign lending into investment spending, government borrowing, and foreign borrowing.
• Financial Risk - uncertainty about future outcomes that involve financial losses and gains.
• Firm - an organization that produces goods and services for sale.
• Fiscal Policy - changes in government spending and taxes designed to affect overall spending.
• Fiscal Year - the time period used for much of government accounting, running from October 1 to September 30. Fiscal years are labeled by the calendar year in which they end.
• Fisher Effect - the principle by which an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged.
• Fixed Exchange Rate - an exchange rate regime in which the government lets the exchange rate against some other currency at or near a particular target.
• Floating Exchange Rate - an exchange rate regime in which the government lets the exchange rate go wherever the market takes it.
• Forecast - a simple prediction of the future.
• Foreign Exchange Controls - licensing systems that limit the right of individuals to buy foreign currency.
• Foreign Exchange Reserves - stocks of foreign currency that governments can use to buy their own currency on the foreign exchange market.
• Free Trade - trade that is unregulated by government tariffs or other artificial barriers; the levels of exports and imports occur naturally, as a result of supply and demand.
• Frictional Unemployment - unemployment due to time workers spend in job search.

G

• Gains From Trade - an economic principle that states that dividing tasks and trading, people can get more of what they want through trade than they could if they tried to be self-sufficient.
• GDP Deflator - a price for a given year that is equal to 100 times the ratio of nominal GDP to real GDP in that year.
• GDP per Capita - GDP divided by the size of the population; equivalent to the average GDP per person.
• Globalization - the phenomenon of growing economic linkages amoung countries.
• Government Borrowing - the amount of funds borrowed by the government in financial markets to buy goods and services.
• Government Purchases of Goods and Services - total purchases by federal, state, and local governments on goods and services.
• Government Transfers - payments by the government to individuals for which no good or service is provided in return.
• Gross Domestic Product (GDP) - the total value of all final goods and services produced in the economy during a given period, usually a year.
• Growth Accounting - estimates the contribution of each of the major factors (physical and human capital, labor, and technology) in the aggregate production function.

H

• Heckscher-Ohlin Model - a model of international trade in which a country has a comparative advantage in a good whose production is intensive in the factors that are abundantly available in that country.
• Horizontal Axis - the horizontal number line of a graph along which values of the x-variable are measured; also referred to as the x-axis.
• Horizontal Intercept - the point at which a curve hit the horizontal axis; it indicates that value of the x-variable when the value of the y-variable is zero.
• Household - a person or a group of people who share income.
• Human Capital - the improvement in labor created by the education and knowledge embodied in the workforce.

I

• Illiquid - describes an asset that cannot be quickly converted into cash without much loss of value.
• Implicit Liabilities - spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics. In the United States, the largest implicit liabilities arise from Social Security and Medicare, which promise transfer payments to current and future retirees (Social Security) and to the elderly (Medicare).
• Import Quota - a form of inefficiency in which sellers offer high-quality goods at a high price even though buyers would prefer a lower quality at a lower price; often the results of a price floor.
• Inefficiently Low Quality - a form of inefficiency in which sellers offer low-quality goods at a low price even though buyers would prefer a higher quality at a higher price; often a result of a price ceiling.
• Inferior Good - a good for which a rise in income decreases the demand for the good.
• Inflation a rise in the overall level of prices.
• Inflation Rate - the annual percent change in a price index - typicallt the consumer price index. The inflation rate is positive when the aggregate price level is rising (inflation) and negative when the aggregate price level is falling (deflation).
• Inflation Targeting - an approach to monetary policy that requires that the central bank try to keep the inflation rate near a predetermined target rate.
• Inflation Tax - the reduction in the value of money held by the public caused by inflation.
• Inflationary Gap - exists when aggregate output is above potential output.
• Infrastructure - physical capital, such as roads, power lines, ports, informations networks, and other parts of an economy, that provides the underpinings or foundation, for economic activity.
• Input - a good or service used to produce another good or service.
• Interaction - (of choices) my choices affect your choices, and vice versa; a feature of most economic situations. The results of this interaction are often quite different from what the individuals intend.
• Interest Rate - the price, calculated as a percentage of the amount borrowed, charged by lenders to borrowers for the use of their savings for one year.
• Interest Rate Effect of a Change in the Aggregate Price Level - the effect on consumer spending and investment spending caused by a change in the purchasing power of consumers' money holdings when the aggregate price level changes. A rise (fall) in the aggregate price level decreases (increases) the purchasing power of consumers' money holdings. In response, consumers try to increase (decrease) their money holdings, which drives up (down) interest rates, thereby decreasing (increasing) consumption and investment.
• Intermediate Goods and Services - goods and services, bough from one firm by another firm, that are inputs for production of final goods and services.
• International Trade Agreements - treaties by which countries agree to lower trade protections against one another.
• Inventories - stocks of goods and raw materials held to satisfy future sales.
• Inventory Investment - the value of the change in total inventories held in the economy during a given period. Unlike other types of investment spending, inventory investment can be negative, if inventories fall.
• Investment Bank - a bank that trades in financial assets and is not covered by deposit insurance.
• Investment Spending - spending on productive physical capital, such as machinery and construction of structures, and on changes to inventories.
• Invisible Hand - a phrase used by Adam Smith to refer to the way in which an individual's pursuit of self-interest can lead, without the individual's intending it, to good results for society as a whole.

J

• Job Search - when workers spend time looking for employment.

K

• Keynesian Cross - a diagram that identifies income-expenditure equilibrium as the point where the planned aggregate spending line crosses the 45-degree line.
• Keynesian Economics - a school of thought emerging out of the works of John Maynard Keynes; according to Keynesian economics, a depressed economy is the result of inadequate spending and government intervention can help a depressed economy through monetary policy and fiscal policy.

L

• Labor Force - the sum of employment and unemployment; that is, the number of people who are currently working plus the number of people who are currently looking for work.
• Labor Force Participation Rate - the percentage of the population age 16 or older that is in the labor force.
• Labor Productivity - output per worker; also referred to as simply productivity. Increases in labor productivity are the only source of long-run economic growth.
• Law of Demand - the principle that a higher price for a good or service, other things equal, leads people to demand a smaller quantity of that good or service.
• Leverage - the degree to which a financial institution is financing its investment with borrow funds.
• Liability - a requirement to pay income in the future.
• License - the right, conferred by the government, to supply a good.
• Life Insurance Company - a financial intermediary that sells policies guaranteeing a payment to a policyholder's beneficiaries when the policyholder dies.
• Linear Relationship - the relationship between two variables in which the slope is constant and therefore is depicted on a graph by a curve that is a straight line.
• Liquid - describes an asset that can be quickly converted into cash without much loss of value.
• Liquidity Preference Model of the Interest Rate - a model of the market for money in which the interest rate is determined by the supply and demand for money.
• Liquidity Trap a situation in which monetary policy is ineffective because nominal interest rates are up against the zero bound.
• Loan - a lending agreement between an individual lender and an individual borrower. Loans are usually tailored to the individual borrower's needs and ability to pay but carry relatively high transactions costs.
• Loan-Backed Securities - assets created by pooling individual loans and selling shares in that pool.
• Loanable Funds Market - a hypothetical market that brings together those who want to lend money (savers) and those who want to borrow (firms with investment spending projects).
• Long-Run Aggregate Supply Curve - a graphical representation that shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible. The long-run aggregate supply curve is vertical because the aggregate price level has no effect on aggregate output in the long run; in the long run, aggregate output is determined by the economy's potential output.
• Long-Run Economic Growth - the sustained rise in the quantity of goods and services the economy produces.
• Long-Run Macroeconomic Equilibrium - the point at which the short-run macroeconomic equilibrium is on the long-run aggregate supply curve; so short-run equilibrium aggregate output is equal to potential output.
• Long-Run Phillips Curve - a graphical representation of the relationship between unemployment and inflation in the long run after expectations of inflation have had time to adjust to experience.
• Long-Term Interest Rate - the interest rate on financial assets that mature a number of years into the future.
• Lump-Sum Taxes - taxes that don't depend on the taxpayer's income.

M

• Macroeconomic Policy Activism - the use of monetary policy and fiscal policy to smooth out the business cycle.
• Macroeconomics - the branch of economics that is concerned with the overall ups and downs in the economy.
• Marginal Analysis - the study of marginal decisions.
• Marginal Decision - a decision made at the "margin" of an activity to do a bit more or a bit less of that activity.
• Marginal Propensity to Consume (MPC) - the increase in consumer spending when disposable income rises by $1. Because consumers normally spend part but not all of an additional dollar of disposable income, MPC is between 0 and 1.
• Marginal Propensity to Save (MPS) - the fraction of an additional dollar of disposable income that is saved; MPS is equal to 1-MPC.
• Marginally Attached Workers - nonworking individuals who say they would like a job and have looked for work in the recent past but are not currently looking for work.
• Market Basket - a hypothetical consumption bundle of consumer purchases of goods and services, used to measure changes in overall price levels.
• Market Economy - an economy in which decisions about production and consumption are made by individual producers and consumers.
• Market Failure - the situation in which a market fails to be efficient.
• Market-Clearing Price - the price at which the market is in equilibrium, that is, the quantity of a good or service demanded equals the quantity of that good or service supplied; also referred to as the equilibrium price.
• Markets for Goods and Services - markets in which firms sell goods and services that they produce to households.
• Maximum - the highest point on a nonlinear curve, where the slope changes from positive to negative.
• Medium of Exchange - an asset that individuals acquire for the purpose of trading for goods and services rather than for their own consumption.
• Menu Cost - the real cost of changing a listed price.
• Merchandise Trade Balance (trade balance) - the difference between a country's exports and imports of goods alone - not including services.
• Microeconomics - the branch of economics that studies how people make decisions and how those decisions interact.
• Minimum - the lowest point on a nonlinear curve, where the slope changes from negative to positive.
• Minimum Wage - a legal floor on the wage rate. The wage rate is the market price of labor.
• Model - a simplified representation of a real situation that is used to better understand real0life situations.
• Monetarism - a theory of business cycles, associated primarily with Milton Friedman, that asserts that GDP will grow steadily if the money supply grows steadily.
• Monetary Aggregate - an overall measure of the money supply. The most common monetary aggregates in the United States are M1, which includes currency in circulation, traveler's checks, and checkable bank deposits, and M2, which includes M1 as well as near-moneys.
• Monetary Base - the sum of currency in circulation and bank reserves.
• Monetary Neutrality - the concept that changes in the monetary supply have no real effects on the economy in the long run and only result in a proportional change in the price level.
• Monetary Policy - changes in the quantity of money in circulation designed to alter interest rates and affect the level of overall spending.
• Monetary Policy Rule - a formula that determines the central bank's actions.
• Money - any asset that can easily be used to purchase goods and services.
• Money Demand Curve - a graphical representation of the relationship between the interest rate and the quantity of money demanded. The money demand curve slopes downward because, other things equal, a higher interest rate increases the opportunity cost of holding money.
• Money Multiplier - the ratio of the money supply to the monetary base.
• Money Supply - the total value of financial assets in the economy that are considered money.
• Money Supply Curve - a graphical representation of the relationship between the quantity of money supplied by the Federal Reserve and the interest rate.
• Movement Along the Demand Curve - a change in the quantity supplied of a good that results from a change in the price of that good.
• Movement Along the Supply Curve - a change in the quantity supplied of a good that results from a change in the price of that good.
• Multiplier - the ratio of total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change.
• Mutual Fund - a financial intermediary that creates a stock portfolio by buying and holding shares in companies and then selling shares of this portfolio to individual investors.

N

• National Income and Product Accounts - method of calculating and keeping track of consumer spending, sales of producers, business investment spending, government purchases, and a variety of other flows of money between different sectors of the economy; also referred to as national accounts.
• National Savings - the sum of private savings and the government's budget balance; the total amount of savings generated within the economy.
• Natural Rate Hypothesis - the hypothesis that because inflation is eventually embedded into expectations, to avoid accelerating inflation over time the unemployment rate equals the expected inflation rate.
• Natural Rate of Unemployment - the normal unemployment rate around which the actual unemployment rate fluctuates; the unemployment rate that arises from the effects of frictional and structural unemployment.
• Near-Money - a financial asset that can't be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits.
• Negative Relationship - a relationship between two variables in which an increase in the value of one variable is associated with a decrease in the value of the other variable. It is illustrated by a curve that slopes downward from left to right.
• Net Exports - the difference between the value of exports and the value of imports. A positive value for net exports indicates that a country is a net exporter of goods and services; a negative value indicates that a country is a net importer of goods and services.
• New Classical Macroeconomics - an approach to the business cycle that returns to the classical view that shifts in the aggregate demand curve affect only the aggregate price level, not aggregate output.
• New Keynesian Economics - theory that argues that market imperfections can lead to price stickiness for the economy as a whole.
• Nominal GDP - the value of all final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced.
• Nominal Interest Rate - the interest rate in dollar terms.
• Nominal Wage - the dollar amount of any given wage paid.
• Nonaccelerating Inflation Rate of Unemployment (NAIRU) - the unemployment rate at which, other things equal, inflation does not change over time.
• Nonlinear Curve - a curve in which the slope is not the same between every pair of points.
• Nonlinear Relationships - the relationship between two variables in which the slope is not constant and therefore is depicted on a graph by a curve that is not a straight line.
• Normal Good - a good for which a rise in income increases the demand for that good - the "normal" case.
• Normative Economics - the branch of economic analysis that makes prescriptions about the way the economy should work.
• North American Free Trade Agreement (NAFTA) - a trade agreement among the United States, Canada, and Mexico.

O

• Offshore Outsourcing - the practice of businesses hiring people in another country to perform various tasks.
• Okun's Law - the negative relationship between the output gap and the unemployment rate, whereby each additional percentage point of output gap reduces the unemployment rate by about 1/2 of a percentage point.
• Omitted Variable - an unobserved variable that, through its influence on other variables, creates the erroneous appearance of a direct casual relationship among those variables.
• Open Economy - an economy that trades goods and services with other countries.
• Open-Market Operation - a purchase or sale of U.S. Treasury bills by the Federal Reserve, normally through a transaction with a commercial bank.
• Opportunity Cost - the real cost of an item: what you must give up in order to get it.
• Origin - the point where the axes of a two-variable graph meet.
• Other Things Equal Assumption - in the development model, the assumption that all relevant factors except the one under study remain unchanged.
• Output Gap - the percentage difference between the actual level of real GDP and potential output.

P

• Pension Fund - a type of mutual fund that holds assets in order to provide retirement income to its members.
• Physical Asset - a claim on a tangible object that gives the owner the right to dispose of the object as he or she wishes.
• Physical Capital - manufactured resources, such as buildings and machines.
• Pie Chart - a circular graph that shows how some total, usually expressed in percentages, is divided among its components.
• Planned Aggregate Spending - the total amount of planned spending in the economy; includes consumer spending and planned investment spending.
• Planned Investment Spending - the investment spending that firms intend to undertake during a given period. Planned investment spending may differ from actual investment spending due to unplanned inventory investment.
• Political Business Cycle - a business cycle that results from the use of macroeconomic policy to serve political ends.
• Positive Economics - the branch of economics analysis that describes the way the economy actually works.
• Positive Relationship - a relationship between two variables in which an increase in the value of one variable is associated with an increase in the value of the other variable. It is illustrated by a curve that slopes upward from left to right.
• Potential Output - the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible.
• Price Ceiling - the maximum price sellers are allowed to charge for a good or service; a form of price control.
• Price Controls - legal restrictions on how high or low a market price may go.
• Price Floor - the minimum price buyers are required to pay for a good or service; a form of price control.
• Price Index - a measure of the cost of purchasing a given market basket in a given year, where that cost is normalized so that is equal to 100 in the selected base year; a measure of overall price level.
• Price Stability - a situation in which the overall cost of living is changing slowly or not at all.
• Private Savings - disposable income minus consumer spending; disposable income that is not spent on consumption but rather goes into financial markets.
• Producer Price Index (PPI) - a measure of the cost of a typical basket of goods and services purchased by producers. Because these commodity prices respond quickly to changes in demand, the PPI is often regarded as a leading indicator of changes in the inflation rate.
• Producer Surplus - a term often used to refer to either individual producer surplus or total producer surplus.
• Production Possibility Frontier - a model that illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given quantity produced of the other.
• Productivity - output per worker; a shortened form of the term labor productivity.
• Protection - policies that limit imports; an alternative term for trade protection.
• Public Debt - government debt held by individuals and institutions outside the government.
• Purchasing Power Parity - (between two countries' currencies) the nominal exchange rate at which a given basket of goods and services would cost the same amount in each country.

Q

• Quantity Control - an upper limit, set by the government, on the quantity of some good that can be bought or sold; also referred to as a quota.
• Quantity Demanded - the actual amount of a good or service consumers are willing to buy at some specific price.
• Quantity Supplied - the actual amount of a good or service producers are willing to sell at some specific price.
• Quota - an upper limit, set by the government, on the quantity of some good that can be bought or sold; also referred to as a quantity controlled.
• Quota Limit - the total amount of a good under a quota or quantity control that can be legally transacted.
• Quote Rent - the difference between the demand price and the supply price at the quota limit; this difference, the earnings that accrue to the license holder, is equal to the market price of the license when the license is traded.

R

• Random Walk - the movement over time of an unpredictable variable.
• Rate of Return - (of an investment project) the profit earned on an investment project expressed as a percentage of its cost.
• Rational Expectations - a theory of expectation formation that holds that individuals and firms make decisions optimally, using all available information.
• Real Business Cycle Theory - a theory of business cycles that asserts that fluctuations in the growth of total factor productivity cause the business cycle.
• Real Exchange Rate - the exchange rate adjusted for international differences in aggregate price levels.
• Real GDP - the total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year.
• Real Income - income divided by the price level
• Real Interest Rate - the nominal interest rate minus the inflation rate.
• Real Wage - the wage rate divided by the price level.
• Recession - a period of economic downturn when output and employment are falling; also referred to as a contraction.
• Recessionary Gap - exists when aggregate output is below potential output.
• Research and Development (R&D) - spending to create new technologies and prepare them for practical use.
• Reserve Ratio - the fraction of bank deposits that a bank holds as reserves. In the United States, the minimum required reserve ratio is set by the Federal Reserve.
• Reserve Requirements - rules set by the Federal Reserve that set the minimum reserve ratio for banks. For checkable bank deposits in the United States, the minimum reserve ratio is set at 10%.
• Resource - anything, such as land, labor, and capital, that can be used to produce something else; includes natural resources (from the physical environment) and human resources (labor, skill, intelligence).
• Revaluation - an increase in the value of a currency that is set under a fixed exchange rate regime.
• Reverse Casuality - the error committed when the true direction of casuality between two variables is reversed, and the independent variable and the dependent variable are incorrectly identified.
• Ricardian Model of International Trade - a model that analyzes international trade under the assumption that opportunity costs are constant.
• Rule of 70 - a mathematical formula that states that the time it takes real GDP per capita, or any other variable that grows gradually over time, to double is approximately 70 divided by the variable's annual growth rate.

S

• Savings and Loans (thrifts) - deposit-taking banks, usually specialized in issuing home loans.
• Savings-Investment Spending - an accounting fact that states that savings and investment spending are always equal for the economy as a whole.
• Scarce - in short supply, a resource> is scarce when there is not enough of the resource available to satisfy all the various ways a society wants to use it.
• Scatter Diagram - a graph that shows points that correspond to actual observations of the x- and y-variables; a curve is usually fitted to the scatter of points to indicate the trend in the data.
• Securitization - the pooling of loans and mortgages made by a financial institution and the sale of shares in such a pool to other investors.
• Self-Correcting - describes an economy in which shocks to aggregate demand affect aggregate output in the short run but not in the long run.
• Self-Regulating Economy - an economy in which problems such as unemployment are resolved without government intervention, through the working of the invisible hand, and in which government attempts to improve the economy's performance would be ineffective at best, and would probably make things worse.
• Shift of the Demand Curve - a change in the quantity demanded at any given price, represented graphically by the change of the original demand curve to a new position, denoted by a new demand curve.
• Shift of the Supply Curve - a change in the quantity supplied of a good or service at any given price, represented graphically by the change of the original supply curve to a new position, denoted by a new supply curve.
• Shoe-Leather Costs - (of inflation) the increased costs of transactions caused by inflation.
• Shortage - the insufficiency of a good or service that occurs when the quantity demanded exceeds the quantity supplied; shortages occur when the price is below the equilibrium price.
• Short-run Aggregate Supply Curve - a graphical representation that shows the positive relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time perioud when many production costs, particularly nominal wages, can be taken as fixed. The short-run aggregate supply curve has a positive slope because a rise in the aggregate price levels leads to a rise in profits, and therefore output, when production costs are fixed.
• Short-Run Equilibrium Aggregate Output - the quantity of aggregate output produced in short-run macroeconomic equilibrium.
• Short-Run Equilibrium Aggregate Price - the aggregate price level in short-run macroeconomic equilibrium.
• Short-Run Macroeconomic Equilibrium - the point at which the quantity of aggregate output supplied is equal to the quantity demanded.
• Short-Run Phillips Curve - a graphical representation of the negative short-run relationship between the unemployment rate and the inflation rate.
• Short-Term Interest Rate - the interest rate on financial assets that mature within less than a year.
• Slope - the ratio of the "rise" (the change between two points on the y-axis) to the "run" (the difference between the same two points on the x-axis); a measure of the steepness of a curve.
• Social Insurance - government programs - like Social Security, Medicare, unemployment insurance. and food stamps - intended to protect families against economic hardship.
• Specialization - a situation in which different people each engage in the different task that he or she is good at performing.
• Stabilization Policy - the use of government policy to reduce the severity of recessions and to rein in excessively strong expansions. There are two main tools of stabilization policy: monetary policy and fiscal policy.
• Stagflation - the combination of inflation and falling aggregate policy.
• Sticky Wages - nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages.
• Stock - a share in the ownership of a company held by a shareholder.
• Store of Value - an asset that is a means of holding purchasing power over time.
• Structural Unemployment - unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate.
• Subprime Lending - lending to home buyers who don't meet the usual criteria for borrowing.
• Substitutes - pairs of goods for which a rise in the price of one of the goods leads to an increase in the demand for the other good.
• Supply and Demand Model - a model of how a competitive market works.
• Supply Curve - a graphical representation of the supply schedule, showing the relationship between quantity supplied and price.
• Supply Price - the price of a given quantity at which producers will supply at that quantity.
• Supply Schedule - the price of a given quantity at which producers will supply at different prices.
• Supply Shock - an event that shifts the short-run aggregate supply curve. A negative supply shock raises production costs and reduces the quantity supplied at any aggregate price level, shifting the curve leftward. A positive supply shock decreases production costs and increases the quantity supplied at any aggregate price level, shifting the curve rightward.
• Surplus - the excess of a good or service that occurs when the quantity supplied exceeds the quantity demanded; surpluses occur when the price is above the equilibrium price.
• Sustainable - describes continued long-run economic growth in the face of the limited supply of natural resources and the impact of growth on the environment.

T

• T-Account - a simple tool that summarizes a business's financial position by showing, in a single table, the business's assets and liabilities, with assets on the left and liabilities on the right.
• Tangent Line - a straight line that just touches a nonlinear curve at a particular point; the slope of the tangent line is equal to the slope of the nonlinear curve at that point.
• Target Federal Funds Rate - the Federal Reserve's desired level for the federal funds rate. The Federal Reserve adjusts the money supply through the purchase and sale of Treasury bills until the actual rate equals the desired rate.
• Tariff - a tax levied on imports.
• Taylor Rule for Monetary Policy - a rule for setting the federal funds rate that takes into account both the inflation rate and the output gap.
• Technology - the technical means for the production of goods and services.
• Theory of Liquidity Preference - Keynes theory to explain why the economy will not self correct or be sensitive to use monetary policy because of the three main reasons people hold money: Ordinary Actions, Precautionary measure, and Speculative purposes. In a recession, people will get less returns for their money so they hold onto it, and interest rates continue to drop and no one buys bonds. People demand money in liquid form.
• Time-Series Graph - a two-variable graph that has dates on the horizontal axis and values of a variable that occurred on those dates on the vertical axis.
• Total Consumer Surplus - the sum of the individual consumer surpluses of all the buyers of a good in a market.
• Total Factor Productivity - the amount of output that can be produced with a given amount of factor inputs.
• Total Producer Surplus - the sum of the individual producer surpluses of all the sellers of a good in a market.
• Total Surplus - the total net gain to consumers and producers from trading in a market; the sum of the consumer surplus and the producer surplus.
• Trade - when individuals provide goods and services to others and receive goods and services in return.
• Trade Balance (Merchandise Trade Balance) - the difference between a country's exports and imports of goods alone - not including services.
• Trade Deficit - when the value of the goods and services bought from foreigners is more than the value of the goods and services sold to consumers abroad.
• Trade Protection - policies that limit imports; also known simply as protection.
• Trade Surplus - when the value of goods and services bought from foreigners is less than the value of the goods and services sold to them.
• Trade-Off - a comparison of the costs and benefits of doing something.
• Transaction Costs - the expenses of negotiating and executing a deal.
• Truncated - cut; in a truncated axis, some of the range of values are omitted, usually to save space.

U

• Underemployment - the number of people who work part-time because they cannot find full-time jobs.
• Unemployment - the total number of people who are actively looking for work but aren't currently employed.
• Unemployment Rate - the percentage of the total number of people in the labor force who are unemployed, calculated as unemployment / (unemployment + employment).
• Unit of Account - a measure used to set prices and make economic calculations
• Unit-of-Account Costs - (of inflation) costs arising from the way inflation makes money a less reliable unit of measurement.
• Unplanned Inventory Investment - unplanned changes in inventories, which occur when actual sales are more or less than businesses expected.

V

• Value Added - (of a producer) the value of a producer's sales minus the value of input prices
• Variable - a quantity that can take on more than one value
• Velocity of Money - the ratio of nominal GDP to the money supply.
• Vertical Axis - the vertical number number line of a graph along which values of y-variable are measured; also referred to as the y-axis.
• Vertical Intercept - the point at which a curve hits the vertical axis; it shows the value of the y-variable when the value of the x-variable is zero.
• Vicious Cycle of Deleveraging - describes the sequence of events that takes the place when a firm's asset sales to cover losses produce negative balance sheet effects on other firms and force creditors to call in their loans, forcing sales of more assets and causing further declines in asset price.

W

• Wasted Resources - a form of inefficiency in which people expend money, effort, and time to cope with the shortages caused by a price ceiling.
• Wealth - (of a household) the value of accumulated savings.
• Wealth Effect of a Change in the Aggregate Price Level - the effect of consumer spending caused by the change in the purchasing power of consumers' assets when the aggregate price level changes. A rise in the aggregate price level decreases the purchasing power of consumers' assets, so consumers decrease their consumption; a fall in the aggregate price level increases the purchasing power of consumers' assets, so consumers increase their consumption.
• Wedge - the difference between the demand price of the quantity transacted and the supply price of the quantity transacted for a good when the supply of the good is legally restricted. Often created by a quantity control, or quota.
• Willingness to Pay - the maximum price a consumer is prepared to pay for a good.
• World Price - the price at which a good can be bought or sold abroad.
• World Trade Organization (WTO) - an international organization of member countries that oversees international trade agreements and rules on disputes between countries over those agreements.

X

• X-Axis - the horizontal number line of a graph along which values of the y-variable are measured; also referred to as the horizontal axis.

Y

• Y-Axis - the vertical number line of a graph along which values of the y-variable are measured; also referred to as the vertical axis.

Z

• Zero Bound - the lower bound of zero on the nominal interest rate.