MacroEcon McConnell Flashcards
(367 cards)
1
Q
change in demand
A
A movement of an entire demand curve or schedule such that the quantity demanded changes at every particular price; caused by a change in one or more of the determinants of demand.
2
Q
growth accounting
A
The bookkeeping of the supply-side elements such as productivity and labor inputs that contribute to changes in real GDP over some specific time period.
3
Q
dumping
A
The sale of a product in a foreign country at prices either below cost or below the prices commonly charged at home. The objective is to increase market share in a foreign market by driving out competition and thereby create a monopoly situation where the exporter will be able to unilaterally dictate price and quality of the product.
4
Q
break-even income
A
The level of disposable income at which households plan to consume (spend) all their income and to save none of it.
5
Q
economizing problem
A
The choices necessitated because society’s economic wants for goods and services are unlimited but the resources available to satisfy these wants are limited (scarce).
6
Q
budget line
A
A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products’ prices.
7
Q
gold standard
A
A historical system of fixed exchange rates in which nations defined their currencies in terms of gold, maintained fixed relationships between their stocks of gold and their money supplies, and allowed gold to be freely exported and imported.
8
Q
personal income (PI)
A
The earned and unearned income available to resource suppliers and others before the payment of personal taxes.
9
Q
International Monetary Fund (IMF)
A
The international association of nations that was formed after the Second World War to make loans of foreign monies to nations with temporary balance of payments deficits and, until the early 1970s, manage the international system of pegged exchange rates agreed upon at the Bretton Woods conference. It now mainly makes loans to nations facing possible defaults on private and government loans.
10
Q
General Agreement on Tariffs and Trade (GATT)
A
The international agreement reached in 1947 in which 23 nations agreed to eliminate import quotas, negotiate reductions in tariff rates, and give each other equal and nondiscriminatory treatment. It now includes most nations and has become the World Trade Organization.
11
Q
national income
A
Total income earned by resource suppliers for their contributions to gross domestic product plus taxes on production and imports; the sum of wages and salaries, rent, interest, profit, proprietors’ income, and such taxes.
12
Q
protective tariff
A
A tariff designed to shield domestic producers of a good or service from the competition of foreign producers.
13
Q
voluntary export restrictions (VER)
A
Voluntary limitations by countries or firms of their exports to a particular foreign nation; undertaken to avoid the enactment of formal trade barriers by the foreign nation.
14
Q
savings account
A
A deposit in a commercial bank or thrift institution on which interest payments are received; generally used for saving rather than daily transactions; a component of the M2 money supply.
15
Q
comparative advantage
A
A situation in which a person or country can produce a specific product at a lower opportunity cost than some other person or country; the basis for specialization and trade.
16
Q
real-business-cycle theory
A
A theory that business cycles result from changes in technology and resource availability, which affect productivity and thus increase or decrease long-run aggregate supply.
17
Q
insider-outsider theory
A
The hypothesis that nominal wages are inflexible downward because firms are aware that workers (“insiders”) who retain employment during recession may refuse to work cooperatively with previously unemployed workers (“outsiders”) who offer to work for less than the current wage.
18
Q
index funds
A
Mutual funds whose portfolios exactly match a stock or bond index (a collection of stocks or bonds meant to capture the overall behavior of a particular category of investments) such as the Standard & Poor’s 500 Index or the Russell 3000 Index.
19
Q
collateral
A
The pledge of specific assets by a borrower to a lender with the understanding that the lender will get to keep the assets if the borrower fails to repay the loan with cash.
20
Q
short-run aggregate supply curve
A
An aggregate supply curve relevant to a time period in which input prices (particularly nominal wages) do not change in response to changes in the price level.
21
Q
equilibrium price
A
The price in a competitive market at which the quantity demanded and the quantity supplied are equal, there is neither a shortage nor a surplus, and there is no tendency for price to rise or fall.
22
Q
allocative efficiency
A
The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized.
23
Q
budget deficit
A
The amount by which expenditures exceed revenues in any year.
24
Q
time preference
A
The human tendency for people, because of impatience, to prefer to spend and consume in the present rather than save and wait to spend and consume in the future; this inclination varies in strength among individuals.
25
liquidity
The degree to which an asset can be converted quickly into cash with little or no loss of purchasing power. Money is said to be perfectly liquid, whereas other assets have lesser degrees of liquidity.
26
mortgage-backed securities
Bonds that represent claims to all or part of the monthly mortgage payments from the pools of mortgage loans made by leaders to borrowers to help them purchase residential property.
27
multiple counting
Wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once.
28
price ceiling
A legally established maximum price for a good, or service. Normally set at a price below the equilibrium price.
29
market failure
The inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or underallocation of resources to the production of a particular good or service because of externalities or informational problems or because markets do not provide desired public goods.
30
vault cash
The currency a bank has on hand in its vault and cash drawers.
31
Security Market Line (SML)
A line that shows the average expected rate of return of all financial investments at each level of nondiversifiable risk, the latter measured by beta.
32
efficiency factor (in growth)
The capacity of an economy to achieve allocative efficiency and productive efficiency and thereby fulfill the potential for growth that the supply factors (of growth) make possible; the capacity of an economy to achieve economic efficiency and thereby reach the optimal point on its production possibilities curve.
33
subprime mortgage loans
High-interest-rate loans to home buyers with above-average credit risk.
34
income approach
The method that adds all the income generated by the production of final goods and final services to measure the gross domestic product.
35
fiscal policy
Changes in government spending and tax collections designed to achieve full employment, price stability, and economic growth; also called discretionary fiscal policy.
36
frictional unemployment
A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.
37
securitization
The process of aggregating many individual financial debts, such as mortgages or student loans, into a pool and then issuing new securities (typically bonds) backed by the pool. The holders of the new securities are entitled to receive the debt payments made on the individual financial debts in the pool.
38
monetary multiplier
The multiple of its excess reserves by which the banking system can expand checkable deposits and thus the money supply by making new loans (or buying securities); equal to 1 divided by the reserve requirement.
39
network effects
Increases in the value of a product to each user, including existing users, as the total number of users rises.
40
economic resources
The land, labor, capital, and entrepreneurial ability that are used to produce goods and services; the factors of production.
41
cyclical deficit
Federal budget deficit that is caused by a recession and the consequent decline in tax revenues.
42
immediate short-run aggregate supply curve
An aggregate supply curve for which real output, but not the price level, changes when the aggregate demand curve shifts; a horizontal aggregate supply curve that implies an inflexible price level.
43
reverse repo
A short-term money loan that the borrower obtains by pledging bonds as collateral. The name reverse repo refers to how the borrower would view the transaction. The same transaction when viewed by the lender would be called a repo.
44
cyclical unemployment
A type of unemployment caused by insufficient total spending (insufficient aggregate demand) and which typically begins in the recession phase of the business cycle.
45
monetary policy
A central bank’s changing of the money supply to influence interest rates and assist the economy in achieving price-level stability, full employment, and economic growth.
46
supply curve
A curve that illustrates the supply for a product by showing how each possible price (on the vertical axis) is associated with a specific quantity supplied (on the horizontal axis).
47
proportional tax
At the individual level, a tax whose average tax rate remains constant as the taxpayer’s income increases or decreases. At the national level, a tax for which the average tax rate (= tax revenue/GDP) remains constant as GDP rises or falls.
48
price index
An index number that shows how the weighted-average price of a “market basket” of goods changes over time relative to its price in a specific base year.
49
labor-force participation rate
The percentage of the working-age population that is actually in the labor force.
50
Okun’s law
The generalization that any 1-percentage-point rise in the unemployment rate above the full-employment rate of unemployment is associated with a rise in the negative GDP gap by 2 percent of potential output (potential GDP).
51
other-things-equal assumption
The assumption that factors other than those being considered are held constant; ceteris paribus assumption.
52
asset demand for money
The amount of money people want to hold as a store of value; this amount varies inversely with the interest rate.
53
trade surplus
The amount by which a nation’s exports of goods (or goods and services) exceed its imports of goods (or goods and services).
54
equation of exchange
MV = PQ, in which M is the supply of money, V is the velocity of money, P is the price level, and Q is the physical volume of final goods and final services produced.
55
nondurable good
A consumer good with an expected life (use) of less than three years.
56
nominal gross domestic product (GDP)
GDP measured in terms of the price level at the time of measurement; GDP not adjusted for inflation.
57
investment
In economics, spending for the production and accumulation of capital and additions to inventories. (For contrast, see financial investment.)
58
structural unemployment
Unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available.
59
Bretton Woods system
The international monetary system developed after the Second World War in which adjustable pegs were employed, the International Monetary Fund help stabilize foreign exchange rates, and gold and the dollar were used as international monetary reserves.
60
European Union (EU)
An association of 28 European nations (as of mid-2013) that has eliminated tariffs and quotas among them, established common tariffs for imported goods from outside the member nations, eliminated barriers to the free movement of capital, and created other common economic policies.
61
liquidity trap
A situation in a severe recession in which the central bank’s injection of additional reserves into the banking system has little or no additional positive impact on lending, borrowing, investment, or aggregate demand.
62
economic growth
(1) An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; (2) an increase of real output (gross domestic product) or real output per capita.
63
wealth effect
The tendency for people to increase their consumption spending when the value of their financial and real assets rises and to decrease their consumption spending when the value of those assets falls.
64
import demand curve
A downsloping curve showing the amount of a product that an economy will import at each world price below the domestic price.
65
law of demand
The principle that, other things equal, an increase in a product’s price will reduce the quantity of it demanded, and conversely for a decrease in price.
66
supply schedule
A table of numbers showing the amounts of a good or service producers are willing and able to make available for sale at each of a series of possible prices during a specified period of time.
67
positive economics
The analysis of facts or data to establish scientific generalizations about economic behavior.
68
new classical economics
The theory that, although unanticipated price-level changes may create macroeconomic instability in the short run, the economy will return to and stabilize at the full-employment level of domestic output in the long run because prices and wages adjust automatically to correct movements away from the full-employment output level.
69
supply factors (in growth)
The four determinants of an economy’s physical ability to achieve economic growth by increasing potential output and shifting out the production possibilities curve. The four determinants are improvements in technology plus increases in the quantity and quality of natural resources, human resources, and the stock of capital goods.
70
nonexcludability
The inability to keep nonpayers (free riders) from obtaining benefits from a certain good; a characteristic of a public good.
71
human capital
The knowledge and skills that make a person productive.
72
Council of Economic Advisers (CEA)
A group of three persons that advises and assists the president of the United States on economic matters (including the preparation of the annual Economic Report of the President).
73
balance-of-payments surplus
Misleading term used in the financial press to describe a net increase in a country’s foreign exchange reserves as it buys and sells foreign exchange in order to maintain a fixed exchange rate. The term is misleading because a nation’s balance of payments statement must always balance (be zero) and can never be in surplus (greater than zero).
74
free-rider problem
The inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexcludability.
75
per-unit production cost
The average production cost of a particular level of output; total input cost divided by units of output.
76
nontariff barriers (NTBs)
All barriers other than protective tariffs that nations erect to impede international trade, including import quotas, licensing requirements, unreasonable product-quality standards, unnecessary bureaucratic detail in customs procedures, and so on.
77
token money
Bills or coins for which the amount printed on the currency bears no relationship to the value of the paper or metal embodied within it; for currency still circulating, money for which the face value exceeds the commodity value.
78
Trade Adjustment Assistance Act
A U.S. law passed in 2002 that provides cash assistance, education and training benefits, health care subsidies, and wage subsidies (for persons age 50 or older) to workers displaced by imports or relocations of U.S. plants to other countries.
79
inflationary expenditure gap
In the aggregate-expenditures model, the amount by which the aggregate expenditures schedule must shift downward to decrease the nominal GDP to its full-employment noninflationary level.
80
marginal analysis
The comparison of marginal (“extra” or “additional”) benefits and marginal costs, usually for decision making.
81
division of labor
The separation of the work required to produce a product into a number of different tasks that are performed by different workers; specialization of workers.
82
economic system
A particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem; a method of organizing an economy, of which the market system and the command system are the two general types.
83
external public debt
The portion of the public debt owed to foreign citizens, firms, and institutions.
84
earmarks
Narrow, specially designated spending authorizations placed in broad legislation by senators and representatives for the purpose of providing benefits to firms and organizations within their constituencies. Earmarked projects are exempt from competitive bidding and normal evaluation procedures.
85
inferior good
A good or service whose consumption declines as income rises, prices held constant.
86
business cycle
Recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.
87
unit of account
A standard unit in which prices can be stated and the value of goods and services can be compared; one of the three functions of money.
88
aggregate demand
A schedule or curve that shows the total quantity of goods and services that would be demanded (purchased) at various price levels.
89
risk premium
The interest rate above the risk-free interest rate that must be paid and received to compensate a lender or investor for risk.
90
direct relationship
The relationship between two variables that change in the same direction, for example, product price and quantity supplied; a positive relationship.
91
quasi-public good
A good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an underallocation of resources.
92
checkable deposit
Any deposit in a commercial bank or thrift institution against which a check may be written.
93
aggregate supply shocks
Sudden, large changes in resource costs that shift an economy’s aggregate supply curve.
94
flexible exchange rate
A rate of exchange that is determined by the international demand for and supply of a nation’s money and that is consequently free to rise or fall because it is not subject to currency interventions. Also referred to as a “floating exchange rate.”
95
balance on capital and financial account
The sum of the capital account balance and the financial account balance.
96
natural rate of unemployment (NRU)
The full-employment rate of unemployment; the unemployment rate occurring when there is no cyclical unemployment and the economy is achieving its potential output; the unemployment rate at which actual inflation equals expected inflation.
97
thrift institution
A savings and loan association, mutual savings bank, or credit union.
98
follower countries
As it relates to economic growth, countries that adopt advanced technologies that previously were developed and used by leader countries.
99
risk-free interest rate
The interest rate earned on short-term U.S. government bonds.
100
monetarism
The macroeconomic view that the main cause of changes in aggregate output and the price level is fluctuations in the money supply; espoused by advocates of a monetary rule.
101
nondiversifiable risk
Investment risk that investors are unable to reduce via diversification; also called systemic risk.
102
aggregate demand–aggregate supply (AD-AS) model
The macroeconomic model that uses aggregate demand and aggregate supply to determine and explain the price level and the real domestic output (real gross domestic product).
103
demand factor (in growth)
The requirement that aggregate demand increase as fast as potential output if economic growth is to proceed as quickly as possible.
104
zero lower bound problem
The constraint placed on the ability of a central bank to stimulate the economy through lower interest rates by the fact that nominal interest rates cannot be driven lower than zero without causing depositors to withdraw funds from the banking system and thus reduce the ability of banks to stimulate the economy via lending.
105
supply shocks
Sudden, unexpected changes in aggregate supply.
106
Board of Governors
The seven-member group that supervises and controls the money and banking system of the United States; the Board of Governors of the Federal Reserve System; the Federal Reserve Board.
107
fractional reserve banking system
A system in which commercial banks and thrift institutions hold less than 100 percent of their checkable-deposit liabilities as reserves of currency held in bank vaults or as deposits at the central bank.
108
disposable income (DI)
Personal income less personal taxes; income available for personal consumption expenditures and personal saving.
109
regressive tax
At the individual level, a tax whose average tax rate decreases as the taxpayer’s income increases. At the national
110
command system
A method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities; socialism; communism. Compare with market system.
111
restrictive monetary policy
Federal Reserve System actions to reduce the money supply, increase interest rates, and reduce inflation; a tight money policy.
112
beta
A relative measure of nondiversifiable risk that measures how the nondiversifiable risk of a given asset or portfolio compares with that of the market portfolio (the portfolio that contains every asset available in the financial markets).
113
limited liability rule
A law that limits the potential losses that an investor in a corporation may suffer to the amount that she paid for her shares in the corporation. Encourages financial investment by limiting risk.
114
velocity
The number of times per year that the average dollar in the money supply is spent for final goods and final services; nominal gross domestic product (GDP) divided by the money supply.
115
currency intervention
A government’s buying and selling of its own currency or foreign currencies to alter international exchange rates.
116
export supply curve
An upward-sloping curve that shows the amount of a product that domestic firms will export at each world price that is above the domestic price.
117
durable good
A consumer good with an expected life (use) of three or more years.
118
saving schedule
A table of numbers that shows the amounts households plan to save (plan not to spend for consumer goods), at different levels of disposable income.
119
Troubled Asset Relief Program (TARP)
A 2008 federal government program that authorized the U.S. Treasury to loan up to $700 billion to critical financial institutions and other U.S. firms that were in extreme financial trouble and therefore at high risk of failure.
120
loan guarantees
A type of investment subsidy in which the government agrees to guarantee (pay off) the money borrowed by a private company to fund investment projects if the private company itself fails to repay the loan.
121
productivity
A measure of average output or real output per unit of input. For example, the productivity of labor is determined by dividing real output by hours of work.
122
open-market operations
The purchases and sales of U.S. government securities that the Federal Reserve System undertakes in order to influence interest rates and the money supply; one method by which the Federal Reserve implements monetary policy.
123
excess reserves
The amount by which a commercial bank’s or thrift institution’s actual reserves exceed its required reserves; actual reserves minus required reserves.
124
demand-pull inflation
Increases in the price level (inflation) resulting from increases in aggregate demand.
125
real gross domestic product (GDP)
Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal.
126
repo
A short-term money loan made by a lender to a borrower that is collateralized with bonds pledged by the borrower. The name repo refers to how the lender would view the transaction. The same transaction when viewed from the perspective of the borrower would be called a reverse repo.
127
demand shocks
Sudden, unexpected changes in demand.
128
expansion
The phase of the business cycle in which real GDP, income, and employment rise.
129
rivalry
(1) The characteristic of a private good, the consumption of which by one party excludes other parties from obtaining the benefit; (2) the attempt by one firm to gain strategic advantage over another firm to enhance market share or profit.
130
contractionary fiscal policy
A decrease in government purchases of goods and services, an increase in net taxes, or some combination of the two, for the purpose of decreasing aggregate demand and thus controlling inflation.
131
creative destruction
The hypothesis that the creation of new products and production methods destroys the market power of existing monopolies.
132
target rate of inflation
The publicly announced annual inflation rate that a central bank attempts to achieve through monetary policy actions if it is following an inflation targeting monetary policy.
133
coordination failure
A situation in which people do not reach a mutually beneficial outcome because they lack some way to jointly coordinate their actions; a possible cause of macroeconomic instability.
134
near-money
Financial assets that are not themselves a medium of exchange but that have extremely high liquidity and thus can be readily converted into money. Includes noncheckable savings accounts, time deposits, and short-term U.S. government securities plus savings bonds.
135
gross domestic product (GDP)
The total market value of all final goods and final services produced annually within the boundaries of a nation.
136
world price
The international market price of a good or service, determined by world demand and supply.
137
shocks
Sudden, unexpected changes in demand (or aggregate demand ) or supply (or aggregate supply).
138
efficiency loss
Reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service. Also called deadweight loss.
139
personal consumption expenditures (C)
The expenditures of households for both durable and nondurable consumer goods.
140
U.S. government securities
U.S. Treasury bills, notes, and bonds used to finance budget deficits; the components of the public debt.
141
determinants of supply
Factors other than price that determine the quantities supplied of a good or service. Also referred to as “supply shifters” because changes in the determinants of supply will cause the supply curve to shift either right or left.
142
modern economic growth
The historically recent phenomenon in which nations for the first time have experienced sustained increases in real GDP per capita.
143
devaluation
A decrease in the governmentally defined value of a currency.
144
long run
(1) In microeconomics, a period of time long enough to enable producers of a product to change the quantities of all the resources they employ, so that all resources and costs are variable and no resources or costs are fixed. (2) In macroeconomics, a period sufficiently long for nominal wages and other input prices to change in response to a change in a nation’s price level.
145
macroeconomics
The part of economics concerned with the performance and behavior of the economy as a whole. Focuses on economic growth, the business cycle, interest rates, inflation, and the behavior of major economic aggregates such as the household, business, and government sectors.
146
balance on goods and services
The exports of goods and services of a nation less its imports of goods and services in a year.
147
capital gain
The gain realized when securities or properties or other assets are sold for a price greater than the price paid for them.
148
M1
The most narrowly defined money supply, equal to currency in the hands of the public and the checkable deposits of commercial banks and thrift institutions.
149
Federal Reserve Note
Paper money issued by the Federal Reserve Banks.
150
demand-side market failures
Underallocations of resources that occur when private demand curves understate consumers’ full willingness to pay for a good or service.
151
expansionary monetary policy
Federal Reserve System actions to increase the money supply, lower interest rates, and expand real GDP; an easy money policy.
152
expenditures approach
The method that adds all expenditures made for final goods and final services to measure the gross domestic product.
153
required reserves
The funds that each commercial bank and thrift institution must deposit with its local Federal Reserve Bank (or hold as vault cash) to meet the legal reserve requirement; a fixed percentage of each bank’s or thrift’s checkable deposits.
154
Wall Street Reform and Consumer Protection Act of 2010
The law that gave authority to the Federal Reserve System (the Fed) to regulate all large financial institutions, created an oversight council to look for growing risk to the financial system, established a process for the federal government to sell off the assets of large failing financial institutions, provided federal regulatory oversight of asset-backed securities, and created a financial consumer protection bureau within the Fed.
155
Federal Open Market Committee (FOMC)
The 12-member group within the Federal Reserve System that decides U.S. monetary policy and how it is executed through open-market operations (in which the Fed buys and sells U.S. government securities to adjust the money supply).
156
Smoot-Hawley Tariff Act
Legislation passed in 1930 that established very high tariffs. Its objective was to reduce imports and stimulate the domestic economy, but it resulted only in retaliatory tariffs by other nations.
157
aggregate expenditures schedule
A table of numbers showing the total amount spent on final goods and final services at different levels of real gross domestic product (real GDP).
158
opportunity-cost ratio
An equivalency showing the number of units of two products that can be produced with the same resources; the equivalency 1 corn ? 3 olives shows that the resources required to produce 3 units of olives must be shifted to corn production to produce 1 unit of corn.
159
determinants of aggregate supply
Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve.
160
medium of exchange
Any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.
161
revenue tariff
A tariff designed to produce income for the federal government.
162
equilibrium world price
The price of an internationally traded product that equates the quantity of the product demanded by importers with the quantity of the product supplied by exporters; the price determined at the intersection of the export supply curve and the import demand curve.
163
cyclical asymmetry
The idea that monetary policy may be more successful in slowing expansions and controlling inflation than in extracting the economy from severe recession.
164
laissez-faire capitalism
A hypothetical economic system in which the government’s economic role is limited to protecting private property and establishing a legal environment appropriate to the operation of markets in which only mutually agreeable transactions would take place between buyers and sellers; sometimes referred to as “pure capitalism.”
165
resource market
A market in which households sell and firms buy resources or the services of resources.
166
mutual funds
Portfolios of stocks and bonds selected and purchased by mutual fund companies, which finance the purchases by pooling money from thousands of individual investors; includes both index funds as well as actively managed funds. Fund returns (profits or losses) pass through to each fund’s investors.
167
eurozone
The 17 nations (as of 2013) of the 28-member (as of 2013) European Union that use the euro as their common currency. The eurozone countries are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
168
M2
A more broadly defined money supply, equal to M1 plus noncheckable savings accounts (including money market deposit accounts), small time deposits (deposits of less than $100,000), and individual money market mutual fund balances.
169
exchange controls
Restrictions that a government may impose over the quantity of foreign currency demand by its citizens and firms and over the rate of exchange as a way to limit the nation’s quantity of outpayments relative to its quantity of inpayments (in order to eliminate a payments deficit).
170
microeconomics
The part of economics concerned with (1) decision making by individual units such as a household, a firm, or an industry and (2) individual markets, specific goods and services, and product and resource prices.
171
logrolling
The trading of votes by legislators to secure favorable outcomes on decisions concerning the provision of public goods and quasi-public goods.
172
money market mutual funds (MMMFs)
Mutual funds that invest in short-term securities. Depositors can write checks in minimum amounts or more against their accounts.
173
substitution effect
(1) A change in the quantity demanded of a consumer good that results from a change in its relative expensive-ness caused by a change in the good’s own price. (2) The reduction in the quantity demanded of the second of a pair of substitute resources that occurs when the price of the first resource falls and causes firms that employ both resources to switch to using more of the first resource (whose price has fallen) and less of the second resource (whose price has remained the same).
174
principal-agent problem
(1) At a firm, a conflict of interest that occurs when agents (workers or managers) pursue their own objectives to the detriment of the principals’ (stockholders’) goals. (2) In public choice theory, a conflict of interest that arises when elected officials (who are the agents of the people) pursue policies that are in their own interests rather than policies that would be in the better interests of the public (the principals).
175
trough
The point in a business cycle at which business activity has reached a temporary minimum; the point at which a recession ends and an expansion (recovery) begins. At the trough, the economy experiences substantial unemployment and real GDP is less than potential output.
176
net exports
Exports minus imports.
177
rent-seeking behavior
The actions by persons, firms, or unions to gain special benefits from government at the taxpayers’ or someone else’s expense.
178
current account
The section in a nation’s international balance of payments that records its exports and imports of goods and services, its net investment income, and its net transfers.
179
residual claimant
In a market system, the economic agent who receives (is claimant to) whatever profit or loss remains (is residual) at a firm after all other input providers have been paid. The residual is compensation for providing the economic input of entrepreneurial ability and flows to the firm’s owners.
180
paradox of voting
A situation where paired-choice voting by majority rule fails to provide a consistent ranking of society’s preferences for public goods or public services.
181
recession
A period of declining real GDP, accompanied by lower real income and higher unemployment.
182
passively managed funds
Mutual funds whose portfolios are not regularly updated by a fund manager attempting to generate high returns. Rather, once an initial portfolio is selected, it is left unchanged so that investors receive whatever return that unchanging portfolio subsequently generates. Index funds are a type of passively managed fund.
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reserve ratio
The fraction of checkable deposits that each commercial bank or thrift institution must hold as reserves at its local Federal Reserve Bank or in its own bank vault; also called the re-serve requirement.
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short run
(1) In microeconomics, a period of time in which producers are able to change the quantities of some but not all of the resources they employ; a period in which some resources (usually plant) are fixed and some are variable. (2) In macroeconomics, a period in which nominal wages and other input prices do not change in response to a change in the price level.
185
transactions demand for money
The amount of money people want to hold for use as a medium of exchange (to make payments); varies directly with nominal GDP.
186
supply-side economics
A view of macroeconomics that emphasizes the role of costs and aggregate supply in explaining inflation, unemployment, and economic growth.
187
gross private domestic investment
(Ig) Expenditures for newly produced capital goods (such as machinery, equipment, tools, and buildings) and for additions to inventories.
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trading possibilities line
A line that shows the different combinations of two products that an economy is able to obtain (consume) when it specializes in the production of one product and trades (exports) it to obtain the other product.
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producer surplus
The difference between the actual price a producer receives (or producers receive) and the minimum acceptable price; the triangular area above the supply curve and below the market price.
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recessionary expenditure gap
The amount by which the aggregate expenditures schedule must shift upward to increase real GDP to its full-employment, noninflationary level.
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total demand for money
The sum of the transactions demand for money and the asset demand for money.
192
time deposit
An interest-earning deposit in a commercial bank or thrift institution that the depositor can withdraw without penalty after the end of a specified period.
193
final goods
Goods that have been purchased for final use (rather than for resale or further processing or manufacturing.)
194
defaults
Situations in which borrowers stop making loan payments or do not pay back loans that they took out and are now due.
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unfunded liability
A future government spending commitment (liability) for which the government has not legislated an offsetting revenue source.
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North American Free Trade Agreement (NAFTA)
The 1993 treaty that established an international free-trade zone composed of Canada, Mexico, and the United States.
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Phillips Curve
A curve showing the relationship between the unemployment rate (on the horizontal axis) and the annual rate of increase in the price level (on the vertical axis).
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scarcity
The limits placed on the amounts and types of goods and services available for consumption as the result of there being only limited economic resources from which to produce output; the fun-damental economic constraint that creates opportunity costs and that necessitates the use of marginal analysis (cost-benefit analysis) to make optimal choices.
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debt crisis
An economic crisis in which government debt has risen so high that the government is unable to borrow any more money due to people losing faith in the government’s ability to repay. Leads to either massive spending cuts or large tax increases, either of which will likely plunge the economy into a recession.
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cyclically adjusted budget
The estimated annual budget deficit or surplus that would occur under existing tax rates and government spending levels if the the economy were to operate at its full-employment level of GDP for a year; the full-employment budget deficit or surplus.
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government failure
Inefficiencies in resource allocation caused by problems in the operation of the public sector (government). Specific examples include the principal-agent problem, the special-interest effect, the collective-action problem, rent seeking, and political corruption.
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average propensity to consume (APC)
Fraction (or percentage) of disposable income that households spend on consumer goods; consumption divided by disposable income.
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saving
Disposable income not spent for consumer goods; equal to disposable income minus personal consumption expenditures; saving is a flow. Compare with savings.
204
public choice theory
The economic analysis of government decision making, politics, and elections.
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normal good
A good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.
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diversifiable risk
Investment risk that investors can reduce via diversification; also called idiosyncratic risk.
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capital
Human-made resources (buildings, machinery, and equipment) used to produce goods and services; goods that do not directly satisfy human wants; also called capital goods. One of the four economic resources.
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median-voter model
The theory that under majority rule the median (middle) voter will be in the dominant position to determine the outcome of an election.
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GDP gap
Actual gross domestic product minus potential output; may be either a positive amount (a positive GDP gap) or a negative amount (a negative GDP gap).
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Federal Reserve System
The U.S. central bank, consisting of the Board of Governors of the Federal Reserve and the 12 Federal Reserve Banks, which controls the lending activity of the nation’s banks and thrifts and thus the money supply; commonly referred to as the “Fed.”
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production possibilities curve
A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.
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real-balances effect
The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level.
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stagflation
Inflation accompanied by stagnation in the rate of growth of output and an increase in unemployment in the economy; simultaneous increases in the inflation rate and the unemployment rate.
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equilibrium price level
In the aggregate demand–aggregate supply (AD-AS) model, the price level at which aggregate demand equals aggregate supply; the price level at which the aggregate demand curve intersects the aggregate supply curve.
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regulatory capture
The situation that occurs when a governmental regulatory agency ends up being controlled by the industry that it is supposed to be regulating.
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menu costs
The reluctance of firms to cut prices during recessions (that they think will be short-lived) because of the costs of altering and communicating their price reductions; named after the cost associated with printing new menus at restaurants.
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actively managed funds
Mutual funds that have portfolio managers who constantly buy and sell assets in an attempt to generate high returns.
218
gross output (GO)
The dollar value of the economic activity taking place at every stage of production and distribution. By contrast, gross domestic product (GDP) only accounts for the value of final output.
219
circular flow diagram
An illustration showing the flow of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and from households to firms.
220
dividends
Payments by a corporation of all or part of its profit to its stockholders (the corporate owners).
221
supply-side market failures
Overallocations of resources that occur when private supply curves understate the full cost of producing a good or service.
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law of supply
The principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease.
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law of increasing opportunity costs
The principle that as the production of a good increases, the opportunity cost of producing an additional unit rises.
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core inflation
The underlying increases in the price level after volatile food and energy prices are removed.
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consumer sovereignty
The determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy; consumers’ direction of production through their dollar votes.
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utility
The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).
227
foreign exchange reserves
Stockpiles of foreign currencies maintained by a nation’s central bank. Obtained when the central bank sells local currency in exchange for foreign currency in the foreign exchange market.
228
households
Economic entities (of one or more persons occupying a housing unit) that provide resources to the economy and use the income received to purchase goods and services that satisfy economic wants.
229
Pigovian tax
A tax or charge levied on the production of a product that generates negative externalities. If set correctly, the tax will precisely offset the overallocation (overproduction) generated by the negative externality.
230
leakage
(1) A withdrawal of potential spending from the income-expenditures stream via saving, tax payments, or imports; (2) a withdrawal that reduces the lending potential of the banking system.
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bankrupt
A legal situation in which an individual or firm finds that it cannot make timely interest payments on money it has borrowed. In such cases, a bankruptcy judge can order the individual or firm to liquidate (turn into cash) its assets in order to pay lenders at least some portion of the amount they are owed.
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national income accounting
The techniques used to measure the overall production of a country’s economy as well as other related variables.
233
inflexible prices
Product prices that remain in place (at least for a while) even though supply or demand has changed; stuck prices or sticky prices.
234
long-run aggregate supply curve
The aggregate supply curve associated with a time period in which input prices (especially nominal wages) are fully responsive to changes in the price level.
235
potential output
The real output (GDP) an economy can produce when it fully employs its available resources.
236
shortage
The amount by which the quantity demanded of a product exceeds the quantity supplied at a particular (below-equilibrium price.
237
market
Any institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of a particular good or service.
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determinants of demand
Factors other than price that determine the quantities demanded of a good or service. Also referred to as “demand shifters” because changes in the determinants of demand will cause the demand curve to shift either right or left.
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real income
The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation.
240
cost-of-living adjustment (COLA)
An automatic increase in the incomes (wages) of workers when inflation occurs; often included in collective bargaining agreements between firms and unions. Cost-of-living adjustments are also guaranteed by law for Social Security benefits and certain other government transfer payments.
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market system
(1) An economic system in which individuals own most economic resources and in which markets and prices serve as the dominant coordinating mechanism used to allocate those resources; capitalism. Compare with command system. (2) All the product and resource markets of a market economy and the relationships among them.
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probability-weighted average
Each of the possible future rates of return from an investment multiplied by its respective probability (expressed as a decimal) of happening.
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consumer surplus
The difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price.
244
special-interest effect
Any political outcome in which a small group (“special interest”) gains substantially at the expense of a much larger number of persons who each individually suffers a small loss.
245
Federal Reserve Banks
The 12 banks chartered by the U.S. government that collectively act as the central bank of the United States. They set monetary policy and regulate the private banking system under the direction of the Board of Governors and the Federal Open Market Committee. Each of the 12 is a quasi-public bank and acts as a banker’s bank in its designated geographic region.
246
substitute goods
Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.
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corporation
A legal entity (“person”) chartered by a state or the federal government that is distinct and separate from the individuals who own it.
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partnership
An unincorporated firm owned and operated by two or more persons.
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monetary rule
(1) A set of guidelines to be followed by a central bank that wishes to adjust monetary policy over time to achieve goals such as promoting economic growth, encouraging full employment, and maintaining a stable price level. (2) The guidelines for conducting monetary policy suggested by monetarism. As traditionally formulated, the money supply should be expanded each year at the same annual rate as the potential rate of growth of real gross domestic product; the supply of money should be increased steadily between 3 and 5 percent per year. (Also see Taylor rule.)
250
public good
A good or service that is characterized by nonrivalry and nonexcludability. These characteristics typically imply that no private firm can break even when attempting to provide such products. As a result, they are often provided by governments, who pay for them using general tax revenues.
251
complementary goods
Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely).
252
purchasing-power-parity theory
The idea that if countries have flexible exchange rates (rather than fixed exchange rates), the exchange rates between national currencies will adjust to equate the purchasing power of various currencies. In particular, the exchange rate between any two national currencies will adjust to reflect the price-level differences between the two countries.
253
rule of 70
A method for determining the number of years it will take for some measure to double, given its annual percentage increase. Example: To determine the number of years it will take for the price level to double, divide 70 by the annual rate of inflation.
254
marginal propensity to consume (MPC)
The fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income.
255
balance sheet
A statement of the assets, liabilities, and net worth of a firm or individual at some given time.
256
crowding-out effect
A rise in interest rates and a resulting decrease in planned investment caused by the federal government’s increased borrowing to finance budget deficits and refinance debt.
257
freedom of enterprise
The freedom of firms to obtain economic resources, to use those resources to produce products of the firm’s own choosing, and to sell their products in markets of their choice.
258
Coase theorem
The idea, first stated by economist Ronald Coase, that some externalities can be resolved through private negotiations among the affected parties.
259
economics
The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity.
260
arbitrage
The activity of selling one asset and buying an identical or nearly identical asset to benefit from temporary differences in prices or rates of return; the practice that equalizes prices or returns on similar financial instruments and thus eliminates further opportunities for riskless financial gains.
261
aggregate supply
A schedule or curve showing the total quantity of goods and services that would be supplied (produced) at various price levels.
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cost-push inflation
Increases in the price level (inflation) resulting from an increase in resource costs (for example, raw-material prices) and hence in per-unit production costs; inflation caused by reductions in aggregate supply.
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excludability
The characteristic of a private good, for which the seller can keep nonbuyers from obtaining the good.
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official reserves
Foreign currencies owned by the central bank of a nation.
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net domestic product (NDP)
Gross domestic product less the part of the year’s output that is needed to replace the capital goods worn out in producing the output; the nation’s total output available for consumption or additions to the capital stock.
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income effect
A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product’s price.
267
prime interest rate
The benchmark interest rate that banks use as a reference point for a wide range of loans to businesses and individuals.
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financial services industry
The broad category of firms that provide financial products and services to help households and businesses earn interest, receive dividends, obtain capital gains, insure against losses, and plan for retirement. Includes commercial banks, thrift institutions, insurance companies, mutual fund companies, pension funds, investment banks, and securities firms.
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paradox of thrift
The seemingly self-contradictory but possibly true statement that increased saving may be both good and bad for the economy. It is always good in the long run when matched with increased investment spending, but may be bad in the short run if there is a recession because it reduces spending on goods and services. If the increased savings are not translated into increased investment, then the fall in consumption spending will not be made up for by an increase in investment. The overall result will be a decrease in output and employment. If the decline in GDP is severe enough, the attempt to save more will actually lead to less overall savings because the higher rate of saving will be applied to a smaller national income. Attempts by households to save more during a recession may simply worsen the recession and result in less saving.
270
balance-of-payments deficit
Misleading term used in the financial press to describe a net decline in a country’s foreign exchange reserves as it buys and sells foreign exchange in order to maintain a fixed exchange rate. The term is misleading because a nation’s balance of payments statement must always balance (be zero) and can never be in deficit (less than zero).
271
zero interest rate policy (ZIRP)
A monetary policy in which a central bank sets nominal interest rates at or near zero percent per year in order to stimulate the economy.
272
capital-intensive goods
Products that require relatively large amounts of capital to produce.
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value added
The value of a product sold by a firm less the value of the products (materials) purchased and used by the firm to produce that product.
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investment demand curve
A curve that shows the amounts of investment demanded by an economy at a series of real interest rates.
275
political business cycle
Fluctuations in the economy caused by the alleged tendency of Congress to destabilize the economy by reducing taxes and increasing government expenditures before elections and to raise taxes and lower expenditures after elections.
276
balance of payments
A summary of all the financial transactions that take place between the individuals, firms, and governmental units of one nation and those of all other nations during a year.
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efficiency wage
An above-market (above-equilibrium) wage that minimizes wage costs per unit of output by encouraging greater effort or reducing turnover.
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nominal income
The number of dollars received by an individual or group for its resources during some period of time.
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increasing returns
An increase in a firm’s output by a larger percentage than the percentage increase in its inputs.
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deflation
A decline in the general level of prices in an economy; a decline in an economy’s price level.
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built-in stabilizer
A mechanism that increases government’s budget deficit (or reduces its surplus) during a recession and increases government’s budget surplus (or reduces its deficit) during an expansion without any action by policymakers. The tax system is one such mechanism.
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aggregate
A collection of specific economic units treated as if they were one unit. Examples: the prices of all individual goods and services are combined into the price level, and all units of output are aggregated into gross domestic product.
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base year
The year with which other years are compared when an index is constructed; for example, the base year for a price index.
284
consumer goods
Products and services that satisfy human wants directly.
285
Consumer Price Index (CPI)
An index that measures the prices of a fixed “market basket” of some 300 goods and services bought by a “typical” consumer.
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market portfolio
The portfolio consisting of every financial asset (including every stock and bond) traded in the financial markets. Used to calculate beta (a measure of the degree of riskiness) for specific stocks, bonds, and mutual funds.
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economic principle
A widely accepted generalization about the economic behavior of individuals or institutions.
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sole proprietorship
An unincorporated firm owned and operated by one person.
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sterilization
Open market operations or changes in bank reserve ratios undertaken by a central bank to offset changes in the domestic money supply caused either by the operation of a fixed exchange rate or by currency interventions made under a managed floating exchange rate.
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Taylor rule
A monetary rule proposed by economist John Taylor that would stipulate exactly how much the Federal Reserve System should change real interest rates in response to divergences of real GDP from potential GDP and divergences of actual rates of inflation from a target rate of inflation.
291
labor productivity
Total output divided by the quantity of labor employed to produce it; the average product of labor or output per hour of work.
292
fixed exchange rate
A rate of exchange that is set in some way and therefore prevented from rising or falling with changes in currency supply and demand
293
economic perspective
A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions.
294
demand schedule
A table of numbers showing the amounts of a good or service buyers are willing and able to purchase at various prices over a specified period of time.
295
marginal cost-marginal benefit rule
As it applies to cost-benefit analysis, the tenet that a government project or program should be expanded to the point where the marginal cost and marginal benefit of additional expenditures are equal.
296
portfolio
A specific collection of stocks, bonds, or other financial investments held by an individual or a mutual fund.
297
factors of production
The four economic resources: land, labor, capital, and entrepreneurial ability.
298
actual reserves
The funds that a bank has on deposit at the Federal Reserve Bank of its district (plus its vault cash).
299
interest-rate effect
The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a re-sult, reduce total spending and real output in the economy (and the reverse for price-level decreases).
300
inventories
Goods that have been produced but remain unsold.
301
interest on excess reserves (IOER)
Interest rate paid by the Federal Reserve on bank excess reserves.
302
financial investment
The purchase of a financial asset (such as a stock, bond, or mutual fund) or real asset (such as a house, land, or factories) or the building of such assets in the expectation of financial gain.
303
self-interest
That which each firm, property owner, worker, and consumer believes is best for itself and seeks to obtain.
304
opportunity cost
The amount of other products that must be forgone or sacrificed to produce a unit of a product.
305
normative economics
The part of economics involving value judgments about what the economy should be like; focused on
306
public investments
Government expenditures on public capital (such as roads, highways, bridges, mass-transit systems, and electric power facilities) and on human capital (such as education, training, and health).
307
nonrivalry
The idea that one person’s benefit from a certain good does not reduce the benefit available to others; a characteristic of a public good.
308
money market deposit accounts (MMDAs)
Interest-bearing accounts offered by commercial banks and thrift institutions that invest deposited funds into a variety of short-term securities. Depositors may write checks against their balances, but there are minimum-balance requirements as well as limits on the frequency of check writing and withdrawls.
309
private good
A good, or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits.
310
labor
Any mental or physical exertion on the part of a human being that is used in the production of a good or service. One of the four economic resources.
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change in quantity supplied
A change in the quantity supplied along a fixed supply curve (or within a fixed supply schedule) as a result of a change in the product’s price.
312
Laffer Curve
A curve relating government tax rates and tax revenues and on which a particular tax rate (between zero and 100 percent) maximizes tax revenues.
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equilibrium quantity
(1) The quantity at which the intentions of buyers and sellers in a particular market match at a particular price such that the quantity demanded and the quantity supplied are equal; (2) the profit-maximizing output of a firm.
314
foreign purchases effect
The inverse relationship between the net exports of an economy and its price level relative to foreign price levels.
315
moral hazard problem
The possibility that individuals or institutions will change their behavior as the result of a contract or agreement. Example: A bank whose deposits are insured against losses may make riskier loans and investments.
316
rational expectations theory
The hypothesis that firms and households expect monetary and fiscal policies to have certain effects on the economy and (in pursuit of their own self-interests) take actions that make these policies ineffective.
317
adverse selection problem
A problem arising when information known to one party to a contract or agreement is not known to the other party, causing the latter to incur major costs. Example: Individuals who have the poorest health are most likely to buy health insurance.
318
terms of trade
The rate at which units of one product can be exchanged for units of another product; the price of a good or service; the amount of one good or service that must be given up to obtain 1 unit of another good or service.
319
product market
A market in which products are sold by firms and bought by households.
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real interest rate
The interest rate expressed in dollars of constant value (adjusted for inflation) and equal to the nominal interest rate less the expected rate of inflation.
321
flexible prices
Product prices that freely move upward or downward when product demand or supply changes.
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collective-action problem
The idea that getting a group to pursue a common, collective goal gets harder the larger the group’s size. Larger groups are more costly to organize and their members more difficult to motivate because the larger the group, the smaller each member’s share of the benefits if the group succeeds.
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start-up firm
A new firm focused on creating and introducing a particular new product or employing a specific new production or distribution method.
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expansionary fiscal policy
An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and ex-panding real output.
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full-employment rate of unemployment
The unemployment rate at which there is no cyclical unemployment of the labor force; equal to between 5 and 6 percent in the United States because some frictional and structural unemployment are unavoidable.
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unemployment
The failure to use all available economic resources to produce desired goods and services; the failure of the economy to fully employ its labor force.
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trade deficit
The amount by which a nation’s imports of goods (or goods and services) exceed its exports of goods (or goods and services).
328
consumption of fixed capital
An estimate of the amount of capital worn out or used up (consumed) in producing the gross domestic product; also called depreciation.
329
federal funds rate
The interest rate that U.S. banks and other depository institutions charge one another on overnight loans made out of their excess reserves.
330
optimal reduction of an externality
The reduction of a negative externality such as pollution to the level at which the marginal benefit and marginal cost of reduction are equal.
331
taxes on production and imports
A national income accounting category that includes such taxes as sales, excise, business property taxes, and tariffs that firms treat as costs of producing a product and pass on (in whole or in part) to buyers by charging a higher price.
332
inflation targeting
The declaration by a central bank of a goal for a specific range of inflation in a future year, coupled with monetary policy designed to achieve the goal.
333
principle of comparative advantage
The proposition that an individual, region, or nation will benefit if it specializes in producing goods for which its own opportunity costs are lower than the opportunity costs of a trading partner, and then exchanging some of the products in which it specializes for other desired products produced by others.
334
government purchases (G)
Expenditures by government for goods and services that government consumes in providing public services as well as expenditures for publicly owned capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and final services.
335
World Trade Organization (WTO)
An organization of 159 nations (as of mid-2013) that oversees the provisions of the current world trade agreement, resolves trade disputes stemming from it, and holds forums for further rounds of trade negotiations.
336
consumption schedule
A table of numbers showing the amounts households plan to spend for consumer goods at different levels of disposable income.
337
long-run vertical Phillips Curve
The Phillips Curve after all nominal wages have adjusted to changes in the rate of inflation; a line emanating straight upward at the economy’s natural rate of unemployment.
338
public debt
The total amount owed by the federal government to the owners of government securities; equal to the sum of past government budget deficits less government budget surpluses.
339
change in supply
A movement of an entire supply curve or schedule such that the quantity supplied changes at every particular price; caused by a change in one or more of the determinants of supply.
340
determinants of aggregate demand
Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve.
341
average expected rate of return
The probability-weighted average of an investment’s possible future returns.
342
land-intensive goods
Products requiring relatively large amounts of land to produce.
343
budget surplus
The amount by which the revenues of the federal government exceed its expenditures in any year.
344
productive efficiency
The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar’s worth of input is the same for all inputs.
345
bond
A financial device through which a borrower (a firm or government) is obligated to pay the principal and interest on a loan at specific dates in the future.\
346
export subsidy
A government payment to a domestic producer to enable the firm to reduce the price of a good or service to foreign buyers.
347
lump-sum tax
A tax that collects a constant amount (the tax revenue of government is the same) at all levels of GDP.
348
intermediate goods
Products that are purchased for resale or further processing or manufacturing.
349
externality
A cost or benefit from production or consumption that accrues to to someone other than the immediate buyers and sellers of the product being produced or consumed (see negative externality and positive externality).
350
asymmetric information
A situation where one party to a market transaction has much more information about a product or service than the other. The result may be an under or overallocation of resources.
351
multiplier
The ratio of a change in equilibrium GDP to the change in investment or in any other component of aggregate expenditures or aggregate demand; the number by which a change in any such component must be multiplied to find the resulting change in equilibrium GDP.
352
store of value
An asset set aside for future use; one of the three functions of money.
353
managed floating exchange rate
An exchange rate that is allowed to change (float) as a result of changes in currency supply and demand but at times is altered (managed) by governments via their buying and selling of particular currencies.
354
capital and financial account
The section of a nation’s international balance of payments that records (1) debt forgiveness by and to foreigners and (2) foreign purchases of assets in the United States and U.S. purchases of assets abroad.
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net private domestic investment
Gross private domestic investment less consumption of fixed capital; the addition to the nation’s stock of capital during a year.
356
balance on current account
The exports of goods and services of a nation less its imports of goods and services plus its net investment income and net transfers in a year.
357
quantitative easing (QE)
An open-market operation in which bonds are purchased by a central bank in order to increase the quantity of excess reserves held by commercial banks and thereby (hopefully) stimulate the economy by increasing the amount of lending undertaken by commercial banks; undertaken when interest rates are near zero and, consequently, it is not possible for the central bank to further stimulate the economy with lower interest rates due to the zero lower bound problem.
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average propensity to save (APS)
Fraction (or percentage) of disposable income that households save; saving divided by disposable income.
359
progressive tax
At the individual level, a tax whose average tax rate increases as the taxpayer’s income increases. At the national level, a tax for which the average tax rate (= tax revenue/GDP) rises with GDP.
360
nominal interest rate
The interest rate expressed in terms of annual amounts currently charged for interest and not adjusted for inflation.
361
injection
An addition of spending into the income-expenditure stream: any increment to consumption, investment, government purchases, or net exports.
362
discount rate
The interest rate that the Federal Reserve Banks charge on the loans they make to commercial banks and thrift institutions.
363
marginal propensity to save (MPS)
The fraction of any change in disposable income that households save; equal to the change in saving divided by the change in disposable income.
364
Input price
This includes the wages paid to workers, the interest paid to the providers of capital, the rent paid to landowners, and the prices paid to suppliers of intermediate goods. Discussed in the SRAS curve.
365
What is the equation for the money multiplier?
1 / (Rerserve Requirement)
This equation helps determine how much money is added into circulation based on the reserve requirement established by banks.
366
Functions of money
A medium of exchange, as a store of value, and as a unit of account.
367
A shift of what graph directly shows the effect of stagflation?
An outward shift in the Phillips curve.
