Glossary.pdf

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G LO SS ARY
absolute advantage—the
comparison
among producers of a good accord-
ing to their productivity
aggregate-demand curve—a
curve that
shows the quantity of goods and
services that households, firms, and
the government want to buy at each
price level
aggregate-supply curve—a
curve that
shows the quantity of goods and
services that firms choose to pro-
duce and sell at each price level
appreciation—an
increase in the value
of a currency as measured by the
amount of foreign currency it can
buy
automatic stabilizers—changes
in fis-
cal policy that stimulate aggregate
demand when the economy goes
into a recession without policymak-
ers having to take any deliberate
action
balanced trade—a
situation in which
exports equal imports
bond—a
certificate of indebtedness
budget deficit—a
shortfall of tax rev-
enue from government spending
budget surplus—an
excess of govern-
ment receipts over government
spending
capital flight—a
large and sudden
reduction in the demand for assets
located in a country
catch-up effect—the
property whereby
countries that start off poor tend to
grow more rapidly than countries
that start off rich
central bank—an
institution designed
to oversee the banking system and
regulate the quantity of money in
the economy
ceteris paribus—a
Latin phrase, trans-
lated as “other things being equal,”
used as a reminder that all variables
other than the ones being studied
are assumed to be constant
circular-flow diagram—a
visual model
of the economy that shows how dol-
lars flow through markets among
households and firms
classical dichotomy—the
theoretical
separation of nominal and real
variables
closed economy—an
economy that
does not interact with other
economies in the world
collective bargaining—the
process by
which unions and firms agree on
the terms of employment
commodity money—money
that takes
the form of a commodity with in-
trinsic value
comparative advantage—the
compari-
son among producers of a good
according to their opportunity
cost
competitive market—a
market with
many buyers and sellers trading
identical products so that each
buyer and seller is a price taker
complements—two
goods for which
an increase in the price of one leads
to a decrease in the demand for the
other
consumer price index (CPI)—a
mea-
sure of the overall cost of the goods
and services bought by a typical
consumer
consumer surplus—a
buyer’s willing-
ness to pay minus the amount the
buyer actually pays
consumption—spending
by house-
holds on goods and services, with
the exception of purchases of new
housing
cost—the
value of everything a seller
must give up to produce a good
cross-price elasticity of demand—a
measure of how much the quantity
demanded of one good responds to
a change in the price of another
good, computed as the percentage
change in quantity demanded of the
first good divided by the percentage
change in the price
crowding out—a
decrease in invest-
ment that results from government
borrowing
crowding-out effect—the
offset in ag-
gregate demand that results when
expansionary fiscal policy raises the
interest rate and thereby reduces in-
vestment spending
currency—the
paper bills and coins in
the hands of the public
cyclical unemployment—the
devia-
tion of unemployment from its
natural rate
deadweight loss—the
fall in total
surplus that results from a market
distortion, such as a tax
demand curve—a
graph of the rela-
tionship between the price of a good
and the quantity demanded
52 3
demand deposits—balances
in bank
accounts that depositors can access
on demand by writing a check
demand schedule—a
table that shows
the relationship between the price
of a good and the quantity
demanded
depreciation—a
decrease in the value
of a currency as measured by the
amount of foreign currency it can
buy
depression—a
severe recession
diminishing returns—the
property
whereby the benefit from an extra
unit of an input declines as the
quantity of the input increases
discount rate—the
interest rate on the
loans that the Fed makes to banks
discouraged workers—individuals
who would like to work but have
given up looking for a job
economics—the
study of how society
manages its scarce resources
efficiency—the
property of society
getting the most it can from its
scarce resources
efficiency wages—above-equilibrium
wages paid by firms in order to in-
crease worker productivity
elasticity—a
measure of the respon-
siveness of quantity demanded
or quantity supplied to one of its
determinants
equilibrium—a
situation in which
supply and demand have been
brought into balance
equilibrium price—the
price that bal-
ances supply and demand
equilibrium quantity—the
quantity
supplied and the quantity de-
manded when the price has ad-
justed to balance supply and
demand
equity—the
property of distributing
economic prosperity fairly among
the members of society
exports—goods
and services that are
produced domestically and sold
abroad
externality—the
impact of one per-
son’s actions on the well-being of a
bystander
Federal Reserve (Fed)—the
central
bank of the United States
fiat money—money
without intrinsic
value that is used as money because
of government decree
524
G L O S S A RY
financial intermediaries—financial
institutions through which savers
can indirectly provide funds to
borrowers
financial markets—financial
institu-
tions through which savers can di-
rectly provide funds to borrowers
financial system—the
group of institu-
tions in the economy that help to
match one person’s saving with
another person’s investment
Fisher effect—the
one-for-one adjust-
ment of the nominal interest rate to
the inflation rate
fractional-reserve banking—a
bank-
ing system in which banks hold
only a fraction of deposits as
reserves
frictional unemployment—unemploy-
ment that results because it takes
time for workers to search for the
jobs that best suit their tastes and
skills
GDP deflator—a
measure of the
price level calculated as the ratio
of nominal GDP to real GDP times
100
government purchases—spending
on
goods and services by local, state,
and federal governments
gross domestic product (GDP)—the
market value of all final goods and
services produced within a country
in a given period of time
human capital—the
accumulation of
investments in people, such as edu-
cation and on-the-job training
import quota—a
limit on the quantity
of a good that can be produced
abroad and sold domestically
imports—goods
and services that
are produced abroad and sold
domestically
income elasticity of demand—a
mea-
sure of how much the quantity de-
manded of a good responds to a
change in consumers’ income, com-
puted as the percentage change in
quantity demanded divided by the
percentage change in income
indexation—the
automatic correction
of a dollar amount for the effects of
inflation by law or contract
inferior good—a
good for which, other
things equal, an increase in income
leads to a decrease in demand
inflation—an
increase in the overall
level of prices in the economy
inflation rate—the
percentage change
in the price index from the preced-
ing period
inflation tax—the
revenue the govern-
ment raises by creating money
investment—spending
on capital
equipment, inventories, and struc-
tures, including household pur-
chases of new housing
job search—the
process by which
workers find appropriate jobs given
their tastes and skills
labor force—the
total number of work-
ers, including both the employed
and the unemployed
labor-force participation rate—the
percentage of the adult population
that is in the labor force
law of demand—the
claim that, other
things equal, the quantity de-
manded of a good falls when the
price of the good rises
law of supply—the
claim that, other
things equal, the quantity supplied
of a good rises when the price of the
good rises
law of supply and demand—the
claim
that the price of any good adjusts to
bring the supply and demand for
that good into balance
liquidity—the
ease with which an
asset can be converted into the
economy’s medium of exchange
macroeconomics—the
study of econ-
omy-wide phenomena, including
inflation, unemployment, and eco-
nomic growth
marginal changes—small
incremental
adjustments to a plan of action
market—a
group of buyers and sellers
of a particular good or service
market economy—an
economy that
allocates resources through the
decentralized decisions of many
firms and households as they in-
teract in markets for goods and
services
market failure—a
situation in which a
market left on its own fails to allo-
cate resources efficiently
market for loanable funds—the
mar-
ket in which those who want to
save supply funds and those who
want to borrow to invest demand
funds
market power—the
ability of a single
economic actor (or small group of
actors) to have a substantial influ-
ence on market prices
medium of exchange—an
item that
buyers give to sellers when they
want to purchase goods and
services
menu costs—the
costs of changing
prices
microeconomics—the
study of how
households and firms make deci-
sions and how they interact in
markets
model of aggregate demand and
aggregate supply—the
model that
most economists use to explain
short-run fluctuations in economic
activity around its long-run trend
monetary neutrality—the
proposition
that changes in the money supply
do not affect real variables
monetary policy—the
setting of the
money supply by policymakers in
the central bank
money—the
set of assets in an econ-
omy that people regularly use to
buy goods and services from other
people
money multiplier—the
amount of
money the banking system gener-
ates with each dollar of reserves
money supply—the
quantity of money
available in the economy
multiplier effect—the
additional shifts
in aggregate demand that result
when expansionary fiscal policy
increases income and thereby in-
creases consumer spending
mutual fund—an
institution that sells
shares to the public and uses the
proceeds to buy a portfolio of stocks
and bonds
national saving (saving)—the
total in-
come in the economy that remains
after paying for consumption and
government purchases
natural-rate hypothesis—the
claim
that unemployment eventually re-
turns to its normal, or natural, rate,
regardless of the rate of inflation
natural rate of unemployment—the
normal rate of unemployment
around which the unemployment
rate fluctuates
G L O S S A RY
525
natural resources—the
inputs into the
production of goods and services
that are provided by nature, such as
land, rivers, and mineral deposits
net exports—the
value of a nation’s ex-
ports minus the value of its imports,
also called the trade balance
net foreign investment—the
purchase
of foreign assets by domestic resi-
dents minus the purchase of domes-
tic assets by foreigners
nominal exchange rate—the
rate
at which a person can trade the
currency of one country for the cur-
rency of another
nominal GDP—the
production of
goods and services valued at cur-
rent prices
nominal interest rate—the
interest rate
as usually reported without a cor-
rection for the effects of inflation
nominal variables—variables
mea-
sured in monetary units
normal good—a
good for which, other
things equal, an increase in income
leads to an increase in demand
normative statements—claims
that at-
tempt to prescribe how the world
should be
open economy—an
economy that in-
teracts freely with other economies
around the world
open-market operations—the
pur-
chase and sale of U.S. government
bonds by the Fed
opportunity cost—whatever
must be
given up to obtain some item
Phillips curve—a
curve that shows the
short-run tradeoff between inflation
and unemployment
physical capital—the
stock of equip-
ment and structures that are used to
produce goods and services
positive statements—claims
that at-
tempt to describe the world as it is
price ceiling—a
legal maximum on the
price at which a good can be sold
price elasticity of demand—a
mea-
sure of how much the quantity
demanded of a good responds to
a change in the price of that good,
computed as the percentage change
in quantity demanded divided by
the percentage change in price
price elasticity of supply—a
measure
of how much the quantity supplied
of a good responds to a change in
the price of that good, computed as
the percentage change in quantity
supplied divided by the percentage
change in price
price floor—a
legal minimum on the
price at which a good can be sold
private saving—the
income that
households have left after paying
for taxes and consumption
producer price index—a
measure of
the cost of a basket of goods and
services bought by firms
producer surplus—the
amount a seller
is paid for a good minus the seller’s
cost
production possibilities frontier—a
graph that shows the combinations
of output that the economy can pos-
sibly produce given the available
factors of production and the avail-
able production technology
productivity—the
amount of goods
and services produced from each
hour of a worker’s time
public saving—the
tax revenue that
the government has left after paying
for its spending
purchasing-power parity—a
theory of
exchange rates whereby a unit of
any given currency should be able
to buy the same quantity of goods
in all countries
quantity demanded—the
amount of a
good that buyers are willing and
able to purchase
quantity equation—the
equation M
V P Y, which relates the quan-
tity of money, the velocity of money,
and the dollar value of the econ-
omy’s output of goods and services
quantity supplied—the
amount of a
good that sellers are willing and
able to sell
quantity theory of money—a
theory
asserting that the quantity of money
available determines the price level
and that the growth rate in the
quantity of money available deter-
mines the inflation rate
rational expectations—the
theory ac-
cording to which people optimally
use all the information they have,
including information about gov-
ernment policies, when forecasting
the future
real exchange rate—the
rate at which a
person can trade the goods and
services of one country for the
goods and services of another
real GDP—the
production of goods
and services valued at constant
prices
real interest rate—the
interest rate
corrected for the effects of inflation
real variables—variables
measured in
physical units
recession—a
period of declining real
incomes and rising unemployment
reserve ratio—the
fraction of deposits
that banks hold as reserves
reserve requirements—regulations
on the minimum amount of re-
serves that banks must hold against
deposits
reserves—deposits
that banks have
received but have not loaned out
sacrifice ratio—the
number of percent-
age points of annual output lost in
the process of reducing inflation by
1 percentage point
scarcity—the
limited nature of soci-
ety’s resources
shoeleather costs—the
resources
wasted when inflation encourages
people to reduce their money
holdings
shortage—a
situation in which quan-
tity demanded is greater than
quantity supplied
stagflation—a
period of falling output
and rising prices
stock—a
claim to partial ownership in
a firm
store of value—an
item that people
can use to transfer purchasing
power from the present to the
future
strike—the
organized withdrawal of
labor from a firm by a union
structural unemployment—unem-
ployment that results because the
number of jobs available in some
labor markets is insufficient to pro-
vide a job for everyone who wants
one
substitutes—two
goods for which an
increase in the price of one leads to
an increase in the demand for the
other
supply curve—a
graph of the relation-
ship between the price of a good
and the quantity supplied
supply schedule—a
table that shows
the relationship between the
526
G L O S S A RY
price of a good and the quantity
supplied
supply shock—an
event that directly
alters firms’ costs and prices, shift-
ing the economy’s aggregate-supply
curve and thus the Phillips curve
surplus—a
situation in which quantity
supplied is greater than quantity
demanded
tariff—a
tax on goods produced
abroad and sold domestically
tax incidence—the
study of who bears
the burden of taxation
technological knowledge—society’s
understanding of the best ways to
produce goods and services
theory of liquidity preference—
Keynes’s theory that the interest
rate adjusts to bring money supply
and money demand into balance
total revenue—the
amount paid by
buyers and received by sellers of a
good, computed as the price of the
good times the quantity sold
trade balance—the
value of a nation’s
exports minus the value of its im-
ports, also called net exports
trade deficit—an
excess of imports
over exports
trade policy—a
government policy
that directly influences the quantity
of goods and services that a country
imports or exports
trade surplus—an
excess of exports
over imports
unemployment insurance—a
govern-
ment program that partially pro-
tects workers’ incomes when they
become unemployed
unemployment rate—the
percent-
age of the labor force that is
unemployed
union—a
worker association that bar-
gains with employers over wages
and working conditions
unit of account—the
yardstick people
use to post prices and record debts
velocity of money—the
rate at which
money changes hands
welfare economics—the
study of how
the allocation of resources affects
economic well-being
willingness to pay—the
maximum
amount that a buyer will pay for
a good
world price—the
price of a good that
prevails in the world market for
that good

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