| absolute advantage | The ability of a country to produce a specific good with fewer resources (per unit of output) than other countries.
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| AD excess | The amount by which aggregate demand must be reduced to achieve fullemployment equilibrium after allowing for price-level changes.
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| AD shortfall | The amount of additional aggregate demand needed to achieve full employment after allowing for price-level changes.
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| adjustable-rate mortgage (ARM) | A mortgage (home loan) that adjusts the nominal interest rate to changing rates of inflation.
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| aggregate demand (AD) | The total quantity of output (real GDP) demanded at alternative price levels in a given time period, ceteris paribus.
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| aggregate expenditure | The rate of total expenditure desired at alternative levels of income, ceteris paribus.
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| aggregate supply (AS) | The total quantity of output (real GDP) producers are willing and able to supply at alternative price levels in a given time period, ceteris paribus.
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| antitrust | Government intervention to alter market structure or prevent abuse of market power.
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| appreciation | A rise in the price of one currency relative to another.
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| arithmetic growth | An increase in quantity by a constant amount each year.
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| asset | Anything having exchange value in the marketplace; wealth.
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| automatic stabilizer | Federal expenditure or revenue item that automatically responds countercyclically to changes in national income, like unemployment benefits, income taxes.
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| average propensity to consume (APC) | Total consumption in a given period divided by total disposable income.
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| balance of payments | A summary record of a country's international economic transactions in a given period of time.
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| balance-of-payments deficit | An excess demand for foreign currency at current exchange rates.
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| balance-of-payments surplus | An excess demand for domestic currency at current exchange rates.
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| bank reserves | Assets held by a bank to fulfill its deposit obligations.
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| barter | The direct exchange of one good for another, without the use of money.
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| base period | The time period used for comparative analysis; the basis for indexing, e.g., of price changes.
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| bond | A certificate acknowledging a debt and the amount of interest to be paid each year until repayment; an IOU.
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| bracket creep | The movement of taxpayers into higher tax brackets (rates) as nominal incomes grow.
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| budget deficit | Amount by which government spending exceeds government revenue in a given time period.
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| budget surplus | An excess of government revenues over government expenditures in a given time period.
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| business cycle | Alternating periods of economic growth and contraction.
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| capital | Final goods produced for use in the production of other goods, e.g., equipment, structures.
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| capital deficit | The amount by which the capital outflow exceeds the capital inflow in a given time period.
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| capital-intensive | Production processes that use a high ratio of capital to labor inputs.
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| capital surplus | The amount by which the capital inflow exceeds the capital outflow in a given time period.
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| categorical grants | Federal grants to state and local governments for specific expenditure purposes.
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| ceteris paribus | The assumption of nothing else changing.
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| comparative advantage | The ability of a country to produce a specific good at a lower opportunity cost than its trading partners.
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| complementary goods | Goods frequently consumed in combination; when the price of good x rises, the demand for good y falls, ceteris paribus.
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| Consumer Price Index (CPI) | A measure (index) of changes in the average price of consumer goods and services.
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| consumption | Expenditure by consumers on final goods and services.
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| consumption function | A mathematical relationship indicating the rate of desired consumer spending at various income levels.
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| consumption possibilities | The alternative combinations of goods and services that a country could consume in a given time period.
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| cost-of-living adjustment (COLA) | Automatic adjustments of nominal income to the rate of inflation.
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| crowding in | An increase in private-sector borrowing (and spending) caused by decreased government borrowing.
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| crowding out | A reduction in private-sector borrowing (and spending) caused by increased government borrowing.
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| cyclical deficit | That portion of the budget deficit attributable to unemployment or inflation.
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| cyclical unemployment | Unemployment attributable to a lack of job vacancies, that is, to inadequate aggregate demand.
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| debt ceiling | An explicit, legislated limit on the amount of outstanding national debt.
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| debt service | The interest required to be paid each year on outstanding debt.
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| deficit ceiling | An explicit, legislated limitation on the size of the budget deficit.
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| deficit spending | The use of borrowed funds to finance government expenditures that exceed tax revenues.
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| deflation | A decrease in the average level of prices of goods and services.
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| demand | The willingness and ability to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus.
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| demand curve | A curve describing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus.
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| demand for money | The quantities of money people are willing and able to hold at alternative interest rates, ceteris paribus.
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| demand-pull inflation | An increase in the price level initiated by excessive aggregate demand.
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| demand schedule | A table showing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus.
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| deposit creation | The creation of transactions deposits by bank lending.
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| depreciation | The consumption of capital in the production process; the wearing out of plant and equipment.
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| depreciation (currency) | A fall in the price of one currency relative to another.
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| devaluation | An abrupt depreciation of a currency whose value was fixed or managed by the government.
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| discount rate | The rate of interest the Federal Reserve charges for lending reserves to private banks.
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| discounting | Federal Reserve lending of reserves to private banks.
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| discouraged worker | An individual who isn't actively seeking employment but would look for or accept a job if one were available.
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| discretionary fiscal spending | Those elements of the federal budget not determined by past legislative or executive commitments.
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| disposable income (Dl) | After-tax income of households; personal income less personal taxes.
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| dissaving | Consumption expenditure in excess of disposable income; a negative saving flow.
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| dumping | The sale of goods in export markets at prices below domestic prices.
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| economic growth | An increase in output (real GDP); an expansion of production possibilities.
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| economics | The study of how best to allocate scarce resources among competing uses.
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| efficiency | Maximum output of a good from the resources used in production.
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| embargo | A prohibition on exports or imports.
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| employment rate | The percentage of the adult population that is employed.
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| entrepreneurship | The assembling of resources to produce new or improved products and technologies.
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| equation of exchange | Money supply (M) times velocity of circulation (V) equals level of aggregate spending (P × Q).
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| equilibrium (macro) | The combination of price level and real output that is compatible with both aggregate demand and aggregate supply.
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| equilibrium GDP | The value of total output at (real GDP) produced at macro equilibrium (AS–AD).
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| equilibrium price | The price at which the quantity of a good demanded in a given time period equals the quantity supplied.
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| equilibrium rate of interest | The interest rate at which the quantity of money demanded in a given time period equals the quantity of money supplied.
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| excess reserves | Bank reserves in excess of required reserves.
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| exchange rate | The price of one country's currency expressed in terms of another's; the domestic price of a foreign currency.
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| expenditure equilibrium | The rate of output at which desired spending equals the value of output.
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| exports | Goods and services sold to foreign buyers.
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| external debt | U.S. government debt (Treasury bonds) held by foreign households and institutions.
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| externalities | Costs (or benefits) of a market activity borne by a third party; the difference between the social and private costs (benefits) of a market activity.
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| extreme poverty (world): | World Bank income standard of less than $1 per day per person (inflation adjusted).
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| factor market | Any place where factors of production (e.g., land, labor, capital) are bought and sold.
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| factors of production | Resource inputs used to produce goods and services, e.g., land, labor, capital, entrepreneurship.
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| federal funds rate | The interest rate for interbank reserve loans.
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| fine-tuning | Adjustments in economic policy designed to counteract small changes in economic outcomes; continuous responses to changing economic conditions.
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| fiscal policy | The use of government taxes and spending to alter macroeconomic outcomes.
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| fiscal restraint | Tax hikes or spending cuts intended to reduce (shift) aggregate demand.
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| fiscal stimulus | Tax cuts or spending hikes intended to increase (shift) aggregate demand.
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| fiscal year (FY) | The 12-month period used for accounting purposes; begins October 1 for the federal government.
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| flexible exchange rates | A system in which exchange rates are permitted to vary with market supply-and-demand conditions; floating exchange rates.
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| foreign-exchange markets | Places where foreign currencies are bought and sold.
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| foreign-exchange reserves | Holdings of foreign exchange by official government agencies, usually the central bank or treasury.
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| free rider | An individual who reaps direct benefits from someone else's purchase (consumption) of a public good.
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| frictional unemployment | Brief periods of unemployment experienced by people moving between jobs or into the labor market.
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| full employment | The lowest rate of unemployment compatible with price stability; variously estimated at between 4 and 6 percent unemployment.
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| full-employment GDP | The value of total market output (real GDP) produced at full employment.
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| GDP deflator | A price index that refers to all goods and services included in GDP.
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| GDP gap (real) | The difference between fullemployment GDP and equilibrium GDP.
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| GDP per capita | Total GDP divided by total population; average GDP.
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| geometric growth | An increase in quantity by a constant proportion each year.
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| gold reserves | Stocks of gold held by a government to purchase foreign exchange.
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| gold standard | An agreement by countries to fix the price of their currencies in terms of gold; a mechanism for fixing exchange rates.
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| government failure | Government intervention that fails to improve economic outcomes.
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| gross business saving | Depreciation allowances and retained earnings.
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| gross domestic product (GDP) | The total market value of all final goods and services produced within a nation's borders in a given time period.
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| gross investment | Total investment expenditure in a given time period.
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| growth rate | Percentage change in real output from one period to another.
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| growth recession | A period during which real GDP grows but at a rate below the long-term trend of 3 percent.
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| human capital | The knowledge and skills possessed by the workforce.
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| hyperinflation | Inflation rate in excess of 200 percent, lasting at least one year.
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| imports | Goods and services purchased from international sources.
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| import quota: | A limit on the quantity of a good that may be imported in a given time period.
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| income quintile | One-fifth of the population, rank-ordered by income (e.g., top fifth).
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| income transfers | Payments to individuals for which no current goods or services are exchanged, e.g., Social Security, welfare, unemployment benefits.
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| income velocity of money | (V) The number of times per year, on average, a dollar is used to purchase final goods and services; PQ ÷ M.
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| inequality trap: | Institutional barriers that impede human and physical capital investment, particularly by the poorest segments of society.
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| inflation | An increase in the average level of prices of goods and services.
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| inflation rate | The annual percentage rate of increase in the average price level.
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| inflationary GDP gap | The amount by which equilibrium GDP exceeds full employment GDP.
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| in-kind transfers: | Direct transfers of goods and services rather than cash; e.g., food stamps, Medicaid benefits, and housing subsidies.
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| infrastructure | The transportation, communications, education, judicial, and other institutional systems that facilitate market exchanges.
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| injection | An addition of spending to the circular flow of income.
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| interest rate | The price paid for the use of money.
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| intermediate goods | Goods or services purchased for use as input in the production of final goods or in services.
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| internal debt | U.S. government debt (Treasury bonds) held by U.S. households and institutions.
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| investment | Expenditures on (production of ) new plant, equipment, and structures (capital) in a given time period, plus changes in business inventories.
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| investment rate: | The percentage of total output (GDP) allocated to the production of new plant, equipment, and structures.
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| item weight | The percentage of total expenditure spent on a specific product; used to compute inflation indexes.
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| labor force | All persons over age 16 who are either working for pay or actively seeking paid employment.
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| labor-force participation rate | The percentage of the working-age population working or seeking employment.
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| labor productivity | Amount of output produced by a worker in a given period of time; output per hour (or day, etc.).
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| laissez faire | The doctrine of "leave it alone," of nonintervention by government in the market mechanism.
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| law of demand | The quantity of a good demanded in a given time period increases as its price falls, ceteris paribus.
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| law of supply | The quantity of a good supplied in a given time period increases as its price increases, ceteris paribus.
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| leakage | Income not spent directly on domestic output but instead diverted from the circular flow, e.g., saving, imports, taxes.
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| liability | An obligation to make future payment; debt.
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| liquidity trap | The portion of the money demand curve that is horizontal; people are willing to hold unlimited amounts of money at some (low) interest rate.
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| macroeconomics | The study of aggregate economic behavior, of the economy as a whole.
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| managed exchange rates | A system in which governments intervene in foreign-exchange markets to limit but not eliminate exchangerate fluctuations; "dirty floats."
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| marginal propensity to consume (MPC) | The fraction of each additional (marginal) dollar of disposable income spent on consumption; the change in consumption divided by the change in disposable income.
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| marginal propensity to import (MPM) | The fraction of each additional (marginal) dollar of disposable income spent on imports.
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| marginal propensity to save (MPS) | The fraction of each additional (marginal) dollar of disposable income not spent on consumption; 1 – MPC.
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| marginal tax rate | The tax rate imposed on the last (marginal) dollar of income.
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| market demand | The total quantities of a good or service people are willing and able to buy at alternative prices in a given time period; the sum of individual demands.
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| market failure | An imperfection in the market mechanism that prevents optimal outcomes.
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| market mechanism | The use of market prices and sales to signal desired outputs (or resource allocations).
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| market power | The ability to alter the market price of a good or service.
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| market shortage | The amount by which the quantity demanded exceeds the quantity supplied at a given price; excess demand.
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| market supply | The total quantities of a good that sellers are willing and able to sell at alternative prices in a given time period, ceteris paribus.
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| market surplus | The amount by which the quantity supplied exceeds the quantity demanded at a given price; excess supply.
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| merit good | A good or service society deems everyone is entitled to some minimal quantity of.
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| microeconomics | The study of individual behavior in the economy, of the components of the larger economy.
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| Millennium Aid Goal: | United Nations goal of raising foreign aid levels to 0.7 percent of donor-country GDP.
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| Millennium Poverty Goal: | United Nations goal of reducing global rate of extreme poverty to 15 percent by 2015.
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| mixed economy | An economy that uses both market signals and government directives to allocate goods and resources.
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| monetary policy | The use of money and credit controls to influence macroeconomic outcomes.
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| money | Anything generally accepted as a medium of exchange.
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| money illusion | The use of nominal dollars rather than real dollars to gauge changes in one's income or wealth.
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| money multiplier | The number of deposit (loan) dollars that the banking system can create from $1 of excess reserves; equal to 1 ÷ required reserve ratio.
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| money supply (M1) | Currency held by the public, plus balances in transactions accounts.
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| money supply (M2) | M1 plus balances in most savings accounts and money market funds.
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| monopoly | A firm that produces the entire market supply of a particular good or service.
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| multiplier | The multiple by which an initial change in aggregate spending will alter total expenditure after an infinite number of spending cycles; 1/(1 – MPC).
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| national debt | Accumulated debt of the federal government.
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| national income (NI) | Total income earned by current factors of production: NDP less depreciation and indirect business taxes; plus net foreign factor income.
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| national-income accounting | The measurement of aggregate economic activity, particularly national income and its components.
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| natural monopoly | An industry in which one firm can achieve economies of scale over the entire range of market supply.
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| natural rate of unemployment | Long-term rate of unemployment determined by structural forces in labor and product markets.
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| net domestic product (NDP) | GDP less depreciation.
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| net exports | The value of exports minus the value of imports: (X – M).
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| net investment | Gross investment less depreciation.
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| nominal GDP | The value of final output produced in a given period, measured in the prices of that period (current prices).
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| nominal income | The amount of money income received in a given time period, measured in current dollars.
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| Okun's Law | 1 percent more unemployment is estimated to equal 2 percent less output.
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| open market operations | Federal Reserve purchases and sales of government bonds for the purpose of altering bank reserves.
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| opportunity cost | The most desired goods or services that are forgone in order to obtain something else.
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| optimal mix of output | The most desirable combination of output attainable with existing resources, technology, and social values.
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| outsourcing | The relocation of production to foreign countries.
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| per capita GDP | The dollar value of GDP divided by total population; average GDP.
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| personal income (Pl) | Income received by households before payment of personal taxes.
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| Phillips curve | An historical (inverse) relationship between the rate of unemployment and the rate of inflation; commonly expresses a trade-off between the two.
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| portfolio decision | The choice of how (where) to hold idle funds.
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| poverty threshold (U.S.) | Annual income of less than $20,000 for family of four (2007, inflation adjusted).
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| precautionary demand for money | Money held for unexpected market transactions or for emergencies.
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| price ceiling | Upper limit imposed on the price of a good.
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| price floor | Lower limit set for the price of a good.
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| price stability | The absence of significant changes in the average price level; officially defined as a rate of inflation of less than 3 percent.
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| private good | A good or service whose consumption by one person excludes consumption by others.
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| product market | Any place where finished goods and services (products) are bought and sold.
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| production possibilities | The alternative combinations of final goods and services that could be produced in a given time period with all available resources and technology.
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| productivity | Output per unit of input, e.g., output per labor-hour.
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| progressive tax | A tax system in which tax rates rise as incomes rise.
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| proportional tax | A tax that levies the same rate on every dollar of income.
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| public choice | Theory of public-sector behavior emphasizing rational self-interest of decision makers and voters.
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| public good | A good or service whose consumption by one person does not exclude consumption by others.
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| quota | A limit on the quantity of a good that may be imported in a given time period.
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| rational expectations | Hypothesis that people's spending decisions are based on all available information, including the anticipated effects of government intervention.
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| real GDP | The value of final output produced in a given period, adjusted for changing prices.
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| real income | Income in constant dollars; nominal income adjusted for inflation.
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| real interest rate | The nominal interest rate minus the anticipated inflation rate.
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| recession | A decline in total output (real GDP) for two or more consecutive quarters.
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| recessionary GDP gap | The amount by which equilibrium GDP falls short of fullemployment GDP.
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| refinancing | The issuance of new debt in payment of debt issued earlier.
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| regressive tax | A tax system in which tax rates fall as incomes rise.
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| relative price | The price of one good in comparison with the price of other goods.
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| required reserves | The minimum amount of reserves a bank is required to hold; equal to required reserve ratio times transactions deposits.
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| reserve ratio | The ratio of a bank's reserves to its total transactions deposits.
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| saving | That part of disposable income not spent on current consumption; disposable income less consumption.
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| Say's Law | Supply creates its own demand.
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| scarcity | Lack of enough resources to satisfy all desired uses of those resources.
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| seasonal unemployment | Unemployment due to seasonal changes in employment or labor supply.
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| severe poverty (world): | World Bank income standard of $2 per day per person (inflation adjusted).
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| shift in demand | A change in the quantity demanded at any (every) given price.
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| speculative demand for money | Money held for speculative purposes, for later financial opportunities.
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| stagflation | The simultaneous occurrence of substantial unemployment and inflation.
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| structural deficit | Federal revenues at full employment minus expenditures at full employment under prevailing fiscal policy.
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| structural unemployment | Unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs.
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| substitute goods | Goods that substitute for each other; when the price of good x rises, the demand for good y increases, ceteris paribus.
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| supply | The ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus.
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| supply-side policy | The use of tax incentives, (de)regulation, and other mechanisms to increase the ability and willingness to produce goods and services.
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| tariff | A tax (duty) imposed on imported goods.
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| tax elasticity of supply | The percentage change in quantity supplied divided by the percentage change in tax rates.
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| tax rebate | A lump-sum refund of taxes paid.
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| terms of trade | The rate at which goods are exchanged; the amount of good A given up for good B in trade.
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| trade deficit | The amount by which the value of imports exceeds the value of exports in a given time period (negative net exports).
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| trade surplus | The amount by which the value of exports exceeds the value of imports in a given time period (positive net exports).
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| transactions account | A bank account that permits direct payment to a third party, for example, with a check.
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| transactions demand for money | Money held for the purpose of making everyday market purchases.
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| transfer payments | Payments to individuals for which no current goods or services are exchanged, like Social Security, welfare, unemployment benefits.
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| Treasury bonds | Promissory notes (IOUs) issued by the U.S. Treasury.
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| underemployment | People seeking full-time paid employment who work only part-time or are employed at jobs below their capability.
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| unemployment | The inability of labor-force participants to find jobs.
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| unemployment rate | The proportion of the labor force that is unemployed.
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| user charge | Fee paid for the use of a publicsector good or service.
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| value added | The increase in the market value of a product that takes place at each stage of the production process.
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| velocity of money (V) | The number of times per year, on average, that a dollar is used to purchase final goods and services; PQ ÷ M.
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| voluntary restraint agreement (VRA) | An agreement to reduce the volume of trade in a specific good; a "voluntary" quota.
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| wealth effect | A change in consumer spending caused by a change in the value of owned assets.
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| yield | The rate of return on a bond; the annual interest payment divided by the bond's price.
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