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Quick Glossary


Accelerator hypothesis (16-3) Theory that the level of net investment depends on the change in expected output.

Accommodating policy (8-10) Attempt by government or central bank, following a supply shock, to raise nominal GDP growth so as to maintain the original output ratio.

Actual real GDP (1-3) The value of total output corrected for any changes in prices.

Actual real interest rate (9-3) The nominal interest rate minus the actual inflation rate.

Adaptive expectations (8-6) Prediction for next period's economic values based on an average of actual values during previous periods.

Adjustable-rate mortgage (13-7) An interest rate that can change frequently in response to changes in short-term interest rates, in contrast to a fixed-rate mortgage.

Aggregate (1-2) Total amount of an economic magnitude for the economy as a whole.

Aggregate demand curve (7-1) The graphical schedule showing different combinations of the price level and real output at which the money and commodity markets are both in equilibrium.

Appreciation (6-3) A rise in the value of one nation's currency relative to another nation's currency. When the dollar can buy more units of a foreign currency, say, the Swiss franc, the dollar is said to appreciate relative to that foreign currency.

Auction market (17-7) A centralized location where professional traders buy and sell a commodity or a financial security.

Automatic stabilization (5-8) The effect (on the government budget deficit or surplus) of the leakage of tax revenues when income rises or falls.

Autonomous magnitude (3-2) An amount independent of the level of income.


Backward-looking expectations (8-6) Predictions for next period's values based only on information on the past behavior of economic variables.

Balance of payments (6-2) The record of a nation's international transactions, both credits (which arise from sales of exports and sales of assets) and debits (which arise from purchases of imports and purchases of assets).

Budget line (5-8) The graphical schedule showing the government budget surplus or deficit at different levels of real income.

Business cycles (1-4) Expansions occurring at about the same time in many economic activities, followed by similarly general recessions and recoveries that merge into the expansion phase of the next cycle.


Capital account (6-2) The part of the balance of payments that records capital flows, which consist of purchases and sales of foreign assets by domestic residents, and purchases and sales of domestic assets by foreign residents.

Capital market instruments (13-2) Assets, sold in financial markets, that have relatively long maturities, can experience large fluctuations in price, and often expose investors to the risk of capital loss and default.

Chain-weighted GDP deflator (2-8) Calculated by weighting the price changes by the average of quantities sold at the beginning and end of the period of change.

Chain-weighted real GDP (2-8) Calculated by valuing changes in quantities by the average of prices charged at the beginning and end of the period of change.

Closed economy (1-8) A nation that has no trade in goods, services, or financial assets with any other nation.

Cold turkey (8-7) An approach to disinflation that implements a sudden and permanent slowdown in nominal GDP growth.

Comparative statics (7-4) A technique of economic analysis in which a comparison is made between two equilibrium positions but ignoring the behavior of the economy between the two equilibrium positions—either the length of time required or the route followed during the transition between the initial and final positions.

Constant growth rate rule (CGRR) (14-3) The rule advocating a fixed percentage growth rate for the money supply, in contrast to the variable growth rate recommended by policy activists.

Consumption expenditures (2-2) Purchases of goods and services by households for their own use.

Contractionary monetary policy (4-9) Government monetary policy that has the effect of lowering GDP and raising interest rates.

Coordination failure (17-7) Result of firms neglecting to act together, due to lack of private incentive, to avoid actions that impose social costs on society.

Cost-of-living agreements (COLAs) (17-9) Contracts that provide for an automatic increase in the wage rate in response to an increase in the price level.

Countercyclical variable (7-7) A variable (such as the real wage) that moves over the business cycle in the direction opposite to real GDP.

Credibility (9-5) The extent to which households and firms believe that an announced monetary or fiscal policy will actually be implemented and maintained as announced.

Cross section (15-3) Data for numerous units (e.g., households, firms, cities, or states) observed at a single period of time.

Crowding out effect (4-10) Reduction of one or more components of private expenditures due to an increase in government spending or a reduction of tax rates.

Current account (6-1, 6-2) The part of the balance of payments that includes exports, imports, investment income, and transfer payments to and from foreigners.

Cyclical deficit (5-8) The amount by which the actual government budget deficit exceeds the structural deficit.

Cyclical surplus (5-8) The amount by which the actual government budget surplus exceeds the structural surplus.

Cyclical unemployment (9-8) The difference between the actual unemployment rate and the natural rate of unemployment.


Demand inflation (8-9) A sustained increase in prices that is preceded by a permanent acceleration of nominal GDP growth.

Demand shocks (8-1, 14-1) Unexpected changes in business and consumer optimism, changes in net exports, and changes in government spending or tax rates (for example, in wartime) not related to stabilization policy.

Depreciation (consumption of fixed capital) (2-6) The part of capital stock used up due to obsolescence and physical wear.

Depreciation (of currency) (6-3) A decline in the value of one nation's currency relative to another nation's currency. When the dollar can buy fewer units of a foreign currency, say, the British pound, the dollar is said to depreciate relative to that foreign currency.

Depreciation rate (16-7) The annual percentage decline in the value of a capital good due to physical deterioration and obsolescence.

Devaluation (6-6) Under the fixed exchange rate system, a nation's reduction of the value of its money in terms of foreign money.

Discount rate (13-5) The interest rate the Federal Reserve charges depository institutions when they borrow reserves.

Discretionary fiscal policy (5-8) Alteration of tax rates and/or government expenditures in a deliberate attempt to influence real output and the unemployment rate.

Discretionary policy (14-3) Approach that treats each macroeconomic episode as a unique event, without any attempt to respond in the same way from one episode to another.

Disinflation (8-7) A marked deceleration in the inflation rate.

Disintermediation (13-7) The withdrawal of funds from financial intermediaries like thrift institutions when market interest rates rose above the interest rate ceilings on savings and time deposit accounts.

Domestic income (2-6) The earnings of domestic factors of production, computed as net domestic product minus indirect business taxes, which in turn are taxes levied on business taxes.

Dynamic multipliers (14-4) The amount by which output is raised during each of several time periods after a given change in a policy instrument.


Economic growth (1-4, 10-2) Topic area of macroeconomics that studies the causes of sustained growth in natural real GDP.

Endogenous variables (3-1) Variables explained by an economic theory.

Equilibrium (3-4) A state in which there exists no pressure for change.

Equilibrium real wage rate (7-6) The real wage rate at which the labor supply and demand curves intersect, so there is no pressure for change.

Exogenous variables (3-1) Variables that are relevant but whose behavior economic theory does not attempt to explain and whose values are taken as given.

Expansion (1-4) Period in the business cycle between the trough and the peak.

Expansionary monetary policy (4-9) Government monetary policy that has the effect of lowering interest rates and raising GDP.

Expectations effect (7-9) The decline in aggregate demand caused by the postponement of purchases when consumers expect prices to decline in the future.

Expectations-augmented Phillips curve (SP curve) (8-2) A schedule relating the inflation rate to the output ratio (or unemployment rate) that shifts its position whenever there is a change in the expected rate of inflation.

Expected rate of inflation (8-2) Rate of inflation that is expected to occur in the future.

Expected real interest rate (9-3) The nominal interest rate minus the expected rate of inflation.

Exports (2-4) Goods produced within one country and shipped to another.

Extinguishing policy (8-10) Attempt by government or central bank, following a supply shock, to reduce nominal GDP growth so as to maintain the original inflation rate.

Extra convenience services (9-6) The services provided by holding one extra dollar of money instead of bonds.


Factor inputs (10-3) The economic elements that directly produce real GDP.

Feedback rule (14-3, 17-3) A rule of stabilization policy that systematically changes a monetary variable like the money supply or interest rates in response to actual or forecasted changes in target variables like inflation or employment.

Final good (2-3) Part of final product.

Final product (2-3) All currently produced goods and services that are sold through the market but are not resold.

Financial deregulation (13-1) Change of rules for U.S. financial markets, begun in the 1970s and continuing today, that has allowed more and more types of assets to serve as money. One of the first changes was permitting banks to pay interest on checking accounts.

Financial intermediaries (13-2) Institutions, such as banks, that make loans to borrowers and obtain funds from savers, usually by accepting deposits.

Financial markets (13-2) Organized exchanges where securities and financial instruments are bought and sold.

Fiscal policy (1-7) Manipulations of government expenditures and tax rates in order to try to influence target variables.

Fisher effect (9-3) Prediction that a one percentage point increase in the expected inflation rate will raise the nominal real interest rate by one percentage point, leaving the expected real interest rate unaffected.

Fisher equation (9-3) Statement that the nominal interest rate equals the expected inflation rate plus the expected real interest rate.

Fixed exchange rate system (6-6) System in which the foreign exchange rate is fixed for long periods of time.

Fixed investment (2-4) All final goods purchased by business that are not intended for resale.

Flexible accelerator theory (16-5) Theory of investment that allows for gradual adjustment of sales expectations and of the capital stock. It also allows for variation in the optimal capital-output ratio.

Flexible exchange rate system (6-6) System in which the foreign exchange rate is free to change every day, to establish an equilibrium between the quantities supplied and demanded of a nation's economy.

Flow magnitude (2-2) An economic magnitude that moves from one economic unit to another at a specified rate per unit of time.

Foreign exchange rate (6-3) The amount of another nation's money that residents of a country can obtain in exchange for a unit of their own money.

Foreign exchange reserves (6-6) Government holdings of foreign money used under a fixed exchange rate system to respond to changes in the foreign demand for and supply of a particular nation's money. Such reserves are also used for intervention under a flexible exchange rate system.

Foreign trade deficit (6-8) The excess of the nation's imports of goods and services over its exports of goods and services.

Foreign trade surplus (6-8) Net exports.

Forward-looking expectations (8-6, 15-1) Predictions of future behavior of an economic variable, using an economic model that specifies the interrelationship of that variable with other variables.


General equilibrium (4-8) A situation of simultaneous equilibrium in all the markets of the economy.

Government budget (1-1) Records government tax revenues and expenditures on goods, services, and transfer payments. Statements about the government budget may apply just to the federal government or to all branches of government (federal, state, and local) together.

Government budget constraint (9-4) Limitation of government spending to the three sources available to finance that spending: tax revenue, creation of bonds, and creation of money.

Government budget deficit (1-1) The excess of government expenditures (on goods, services, and transfer payments) over tax revenue.

Government budget surplus (1-1) The excess of government tax revenues over government expenditures.

Gross (2-6) Economic aggregate that includes capital consumption allowances.

Gross domestic product (1-3) The value of all currently produced goods and services sold on the market during a particular time interval.

Gross national product (GNP) (2-4) Goods and services produced by labor and capital supplied by U.S. residents, whether the actual production takes place within the borders of the United States or in a foreign country.


High-powered money (13-4) The sum of currency held outside depository institutions and the reserves held inside them.

Human capital (10-7) The value over one's lifetime of the extra earnings made possible by education.

Hyperinflation (9-1) A very rapid inflation, sometimes defined as a rate of more than 22 percent per month or 1000 percent per year, experienced over a year or more.


Implicit GDP deflator (2-8) The economy's aggregate price index, defined as the ratio of nominal GDP to chain-weighted real GDP.

Imports (2-4) Goods consumed within one country but produced in another country.

Incomes policy (9-5) An attempt by policymakers to moderate increases in wages and other income, either by persuasion or by legal rules.

Indexed bond (9-7) A bond that pays a fixed real interest rate; its nominal interest rate is equal to this real interest rate plus the actual inflation rate.

Induced consumption (3-2) The portion of consumption spending that responds to changes in income.

Induced saving (3-4) The portion of saving that responds to changes in income.

Inflation (8-1) A sustained upward movement in the aggregate price level that is shared by most products.

Inflation differential (6-5) Foreign inflation minus domestic inflation.

Inflation rate (1-1) The percentage rate of increase in the economy's average level of prices.

Inflation tax (9-4) The revenue the government receives from inflation, the same as seignorage (the inflation rate times real high-powered money), but viewed from the perspective of households.

Infrastructure (11-1) Roads, sewers, airports, and, more broadly, education, paid for by public investment, that provide widespread benefits to consumers and raise the return on private investment.

Injections (2-4) Nonconsumption expenditures.

Interest rate (1-1) The percentage rate that is paid by borrowers to lenders.

Interest rate differential (6-9) The average U.S. interest rate minus the average foreign interest rate.

Intermediate good (2-3) A product resold by its purchaser either in its present form or in an altered form.

Intertemporal substitution (17-4) Workers work more in periods of high real wages and less in periods of low real wages. Also occurs when producers raise output in periods of high prices and reduce output in periods of low prices.

Intervention (6-6) Under the flexible exchange rate system, the buying or selling of a nation's money by domestic or foreign central banks in order to prevent unwanted variations in the foreign exchange rate.

Inventory investment (2-4) All changes in the stock of raw materials, parts, and finished goods held by business.

Investment (2-4) Portion of final product that adds to the nation's stock of income-yielding physical assets or that replaces old, worn-out physical assets.

IS curve (4-4) The schedule that identifies the combinations of income and the interest rate at which the commodity market is in equilibrium; everywhere along the IS curve the demand for commodities equals the supply.


Keynes effect (7-9) The stimulus to aggregate demand caused by a decline in the interest rate.


Labor force (2-9) Total of persons employed and unemployed.

Labor productivity (11-2) Output per hour of work.

Large open economy (6-9) An economy that can influence its domestic interest rate. A high domestic interest rate generates a steady stream of capital inflows that are not great enough to eliminate an interest rate differential between the domestic and foreign interest rate; a low domestic interest rate generates a steady stream of capital outflows.

Leakages (2-4) The portion of total income that flows to taxes or saving rather than into purchases of consumer goods.

Life-cycle hypothesis (LCH) (15-1) Conjecture that households base their current consumption on their total lifetime incomes and their wealth.

Liquidity constraint (15-6) Occurs when households cannot borrow as much as they wish, even though there is sufficient expected future income to repay the loans.

Liquidity trap (5-2) Situation in which the central bank loses its ability to reduce the interest rate.

LM curve (4-7) The schedule that identifies the combinations of income and the interest rate at which the money market is in equilibrium; on the LM curve the demand for money equals the supply of money.

Long-run aggregate supply curve (7-7) A vertical line drawn at the natural level of real GDP; it shows that equilibrium in the labor market can be achieved at many different price levels but only a single level of output.

Long-run equilibrium (7-7) A situation in which labor input is the amount voluntarily supplied and demanded at the equilibrium real wage rate.

Long-term labor contracts (17-9) Agreements between firms and workers that set the level of nominal wage rates for a year or more.

Lucas model (17-3) Economic model based on the three assumptions of market clearing, imperfect information, and rational expectations.


M1 (13-3) The U.S. definition of the money supply that includes only currency, transactions accounts, and traveler's checks.

M2 (13-3) The U.S. definition of the money supply that includes M1; savings deposits, including money market deposit accounts; small time deposits; and money market mutual funds.

Macroeconomic externality (17-7) A cost incurred by society as a result of a decision by an individual economic agent (worker or business firm).

Macroeconomics (1-1) The study of the major economic totals or aggregates.

Marginal product of capital (MPK) (16-6) The extra output that a firm can produce by adding an extra unit of capital.

Marginal propensity to consume (3-2) The dollar change in consumption expenditures induced by a dollar change in disposable income.

Marginal propensity to save (3-2) The change in personal saving induced by a dollar change in disposable income.

Market-clearing model (7-9) Theory that the economy is always in equilibrium, at the intersection of supply and demand curves, particularly in the labor market.

Medium of exchange (4-5) Units used for buying and selling goods and services; a universal alternative to the barter system.

Menu cost (17-6) Any expense associated with changing prices, including the costs of printing new menus or distributing new catalogs.

Mismatch unemployment (9-8) Structural unemployment; one of the two components of the natural rate of unemployment (the other being turnover, or frictional unemployment); it occurs when the present location or skills of members of the labor force do not match location or skill requirements of job vacancies.

Monetarism (14-3) A school of thought that opposes activist or discretionary monetary policy and instead favors a fixed rule for the growth rate of high-powered money or of the money supply.

Monetary impotence (7-9) Failure of real GDP to respond to an increase in the real money supply.

Monetary policy (1-7) Changes made in the money supply or interest rates or both in order to try to influence target variables.

Money market instruments (13-2) Assets sold in financial markets that have short maturities, usually less than one year, small fluctuations in price, and minimal risk of default.

Money multiplier (13-4) The ratio (M/H) of the money supply to high-powered money. There is a separate money multiplier for each definition of the money supply, e.g., M1/H and M2/H.

Money-multiplier shock (13-5) Any event that causes the money multiplier to change, such as a change in the public's demand for currency relative to deposits, or a shift between deposits having different reserve requirements.

Money supply (4-5) Currency and transactions accounts, including checking accounts at banks and thrift institutions.

Multifactor productivity (10-5) The growth in multifactor productivity is the growth rate of output per hour of work, minus the contribution to output of the growth in the quantity of other factors of production per hour of work, notably capital but sometimes including energy, raw materials, or other factors of production.

Multiplier (3-5) The ratio of the change in output to the change in planned autonomous spending that causes it; also 1.0 divided by the marginal leakage rate (the fraction of an extra dollar of income that is not spent on consumption).

Multiplier uncertainty (14-4) The lack of firm knowledge regarding the change in output caused by a change in a policy instrument.


National Income and Product Accounts (2-3) Official U.S. government economic accounting system that keeps track of GDP and its subcomponents.

National saving (5-9, 12-2) The sum of private saving (by both households and business firms) and government saving (the government budget surplus).

Natural employment surplus or deficit (NED) (5-8) The government budget surplus or deficit at the natural level of real GDP.

Natural rate hypothesis (17-2) The hypothesis that shifts in aggregate demand have no long-run effect on real GDP.

Natural rate of unemployment (1-3) The level of the unemployment rate at which the inflation rate is constant, with no tendency to accelerate or decelerate.

Natural real GDP (1-3) The level of real GDP at which the inflation rate is constant, with no tendency to accelerate or decelerate.

Net (2-6) Economic aggregate excluding capital consumption allowances.

Net domestic product (2-6) GDP minus depreciation.

Net exports (2-4) Exports minus imports.

Net foreign investment (2-4) Equal to exports minus imports.

Net international investment position (6-2) The difference between all foreign assets owned by a nation's citizens and domestic assets owned by foreign citizens.

Neutral policy (8-10) Attempt by government or central bank, following a supply shock, to maintain nominal GDP growth so as to allow a decline in the output ratio equal to the increase of the inflation rate.

New Keynesian economics (17-6) Approach that explains rigidity in prices and wages as consistent with the self-interest of firms and workers, all of which are assumed to have rational expectations.

Nominal (2-7) An adjective that modifies any economic magnitude measured in current prices.

Nominal anchor (14-8) A rule that sets a limit on the growth rate of a nominal variable, for instance, high-powered money, the money supply, the price level, or nominal GDP, to prevent inflation from accelerating without limit.

Nominal GDP (2-7) The value of gross domestic product in current (actual) prices.

Nominal interest rate (9-3) The market interest rate actually charged by financial institutions and earned by lenders.

Nominal rigidity (17-6) A factor that inhibits the flexibility of the nominal price level due to some factor, such as menu costs and staggered contracts. Such factors make it costly for firms to change the nominal price or wage level.

Non-market-clearing model (7-9, 17-6) Workers and firms are not continuously on their respective demand and supply schedules, but rather are pushed off these schedules by the gradual adjustment of prices.


Okun's law (2-10) A regular negative relationship between the output ratio (Y/YN) and the gap between the actual unemployment rate and the average rate of unemployment.

Open economy (1-8, 6-1) An economy that exports (sells) goods and services to other nations, buys imports from them, and has financial flows (capital flows) to and from foreign nations.

Open-market operations (13-5) Purchases and sales of government securities made by the Federal Reserve in order to change high-powered money.


Parameter (3-4) A value taken as given or known within a particular analysis.

Peak (1-4) The highest point reached by real output in each business cycle.

Perfect capital mobility (6-7) A condition that occurs when investors regard one nation's financial assets as a perfect substitute for foreign money (because commissions and fees are very low), and when investors respond instantaneously to an interest rate differential between domestic and foreign assets by moving sufficient assets to eliminate that differential.

Permanent income (15-4) The average income that people expect to receive over a period of years in the future.

Permanent-income hypothesis (PIH) (15-1) Conjecture that consumption spending depends on the long-run average (or permanent) income that people expect to receive.

Persistent unemployment (7-9) A situation in which a high level of unemployment can last for many years, as in the United States from 1929 to 1941 and from 1980 to 1985.

Personal consumption deflator (2-8) The price deflator for the personal consumption expenditures component of GDP.

Personal disposable income (2-6) Personal income minus personal income tax payments.

Personal income (2-6) Income received by households from all sources, including earnings and transfer payments.

Personal saving (2-4) That part of personal income that is neither consumed nor paid out in taxes.

Pigou effect (real balance effect) (7-9) The direct stimulus to aggregate demand caused by an increase in the real money supply; does not require a decline in the interest rate.

Policy activism (14-1) Active use of instruments of monetary and fiscal policy to offset changes in private sector spending.

Policy credibility (14-6) The belief by the public that the policymakers will actually carry out an announced policy.

Policy ineffectiveness proposition (17-3) Assertion that predictable changes in monetary policy cannot affect real output.

Policy instruments (1-7, 14-2) Elements that government policymakers can manipulate directly to influence target variables.

Policy mix (5-4) The combination of monetary and fiscal policy in effect in a given situation.

Policy rule (14-1) Requirement of a fixed path of a policy instrument like the short-term interest rate, of an intermediate variable like the money supply, or a target variable like inflation or unemployment. Also requirement of a specified response of a policy instrument to a given change in a target variable.

Price index (2-8) Weighted average of prices at any given time, divided by the prices of the same goods in a base year.

Production function (10-3) A relationship, usually written algebraically, that shows how much output can be produced by a given quantity of factor inputs.

Productivity (1-1) Average output produced per employee or per hour.

Purchasing power parity (PPP) theory (6-5) Theory that the prices of identical goods should be the same in all countries, differing only by the cost of transport and any import (or customs) duties.


Quantity theory of money (7-8) Theory that actual output tends to grow steadily, while velocity is determined by payment practices such as the use of cash vs. checks, and that as a result a change in the money supply mainly affects the price level and has little or no effect on velocity or output.


Rate of return (4-3) Annual earnings of an investment project divided by its total cost.

Rate of time preference (12-2) The extra amount a consumer would be willing to pay to be able to obtain a given quantity of consumption goods now rather than a year from now.

Rational expectations (15-6, 17-3) Forecasts of future economic magnitudes based on information currently available about the past performance of the economy and future government policies.

Real balance effect (Pigou effect) (7-9) The direct stimulus to aggregate demand caused by an increase in the real money supply; does not require a decline in the interest rate.

Real business cycle (RBC) model (17-4) Explanation attributing business cycles in output and employment to technology or supply shocks.

Real consumption wage (10-2) The nominal wage rate divided by the price deflator for personal consumption expenditures.

Real exchange rate (6-5) The average nominal foreign exchange rate between a country and its trading partners, adjusted for the difference in inflation rates between that country and its trading partners.

Real GDP (2-7) Value of gross domestic product in constant prices.

Real GDP gap (output gap) (1-4) The difference between actual real GDP and natural real GDP.

Real interest rate (1-6) The nominal interest rate minus the inflation rate.

Real money balances (4-6) Total money supply divided by the price level.

Real product wage (10-2) The nominal wage rate divided by the price index for total output, such as the GDP deflator.

Real rigidity (17-6) A factor that makes firms reluctant to change the real wage, the relative wage, or the relative price.

Recession (1-4) The interval in the business cycle between the peak and the trough.

Redistribution effect (7-9) The decline in aggregate demand caused by the effect of falling prices in redistributing income from high-spending debtors to low-spending savers.

Required reserves (13-5) The reserves that Federal Reserve regulations require depository institutions to hold.

Reserve requirements (13-5) Rules, which apply only to transactions accounts, that stipulate the minimum fraction of deposits that must be held as reserves.

Residual (10-5) The amount that remains after subtracting from the rate of real GDP growth all of the identifiable sources of economic growth.

Revaluation (6-6) A nation's raising of the value of its money when its foreign exchange reserves become so excessive that they cause domestic inflation.

Rigid rule (14-3) A rule for policy that sets a key policy instrument at a fixed value as in a constant growth rate rule for the money supply.

Rigid wages (7-9) The failure of the nominal wage rate to adjust by the amount needed to maintain equilibrium in the labor market.


Sacrifice ratio (8-7) The cumulative loss of output incurred during a disinflation divided by the permanent reduction in the inflation rate.

Seignorage (9-4) The revenue the government receives from inflation; equal to the inflation rate times real high-powered money.

Self-correcting forces (7-8) The role of flexible prices in stabilizing real GDP under some conditions.

Short-run aggregate supply curve (7-1) Graph of the amount of output that business firms are willing to produce at different price levels.

Short-run equilibrium (7-7) The point where the aggregate demand curve crosses the short-run aggregate supply curve.

Short-run Phillips (SP) curve (8-2) The schedule relating real GDP to the inflation rate achievable given a fixed expected rate of inflation.

Small open economy (6-9) An economy with perfect capital mobility but with no power to set its domestic interest rate at a level that differs from foreign interest rates.

Solow's residual (10-5) Growth in multifactor productivity.

Stabilization policy (1-7) Any policy that seeks to influence the level of aggregate demand.

Staggered contracts (17-6) Wage contracts that have different expiration dates for different groups of firms or workers.

Standard of living (11-2) Output per capita or member of the population.

Steady state (9-3) A situation in which output and capital input grow at the same rate, implying a fixed ratio of output to capital input.

Stock (2-2) An economic magnitude in the possession of a given economic unit at a particular point in time.

Store of value (4-5) A method of storing purchasing power when receipts and expenditures are not perfectly synchronized.

Structural deficit (5-8) What the government budget deficit would be if the economy were operating at natural real GDP.

Structural surplus (5-8) What the government budget surplus would be if the economy were operating at natural real GDP.

Supply inflation (8-9) An increase in prices that stems from an increase in business costs not directly related to a prior acceleration of nominal GDP growth.

Supply shock (8-1) Caused by a sharp change in the price of an important commodity.

Supply-side economics (12-7) Theory predicting that a reduction in marginal income tax rates will create an increase in the supply of output, that is, in natural real GDP.


Target variables (1-7, 14-2) Economic aggregates whose values society cares most about—society's goals.

Thrift institutions (13-2) Financial intermediaries such as savings and loan institutions, mutual savings banks, and credit unions.

Time inconsistency (14-6) Policymakers' deviation from a policy after it is announced and private decisionmakers have reacted to it.

Time series (15-3) Data covering a span of time of one or more series (e.g., disposable income or consumption spending).

Total labor force (2-9) The total of the civilian employed, the armed forces, and the unemployed.

Transfer payments (2-3) Payments for which no goods or services are produced in return.

Transitory income (15-4) The difference between actual income and permanent income; it is not expected to recur.

Trilemma (6-1) The impossibility for any nation of maintaining simultaneously (1) independent control of domestic monetary policy, (2) fixed exchange rates, and (3) free flows of capital with other nations.

Trough (1-4) The lowest point reached by real output in each business cycle.

Turnover unemployment (frictional unemployment) (9-8) One of the two components of the natural rate of unemployment (the other being mismatch, or structural unemployment), it occurs in the normal process of job search.


Unanticipated inflation (9-3) Situation in which the actual inflation rate (p) differs from the expected (or anticipated) inflation rate (pe).

Unemployed (2-9) Persons without jobs who are either on temporary layoff or have taken specific actions to look for work.

Unemployment rate (1-1, 2-9) A percentage that expresses the ratio of the number of jobless individuals actively looking for work or on temporary layoff divided by the total employed and unemployed in the labor force.

Unintended inventory investment (3-4) The amount business firms are forced to accumulate when planned expenditures are less than income.

Unit of account (4-5) A way of recording receipts, expenditures, assets, and liabilities.

User cost of capital (16-6) The cost to the firm of using a piece of capital for a specified period.


Value added (2-3) The value of the labor and capital services that take place at a particular stage of the production process.


Wage indexation (cost-of-living agreements) (9-5) An automatic increase in the wage rate in response to an increase in a price index.

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