incentives: rewards and penalties that motivate behavior (chapter 01)
scarce: when there isn't enough of a specific resource to satisfy all of our wants (chapter 01)
great economic problem: how to arrange our scarce resources to satisfy as many of our wants as possible (chapter 01)
opportunity cost: the value of the opportunities lost when a choice is made (chapter 01)
inflation: an increase in the general level of prices (chapter 01)
gross domestic product (GDP): the market value of all finished goods and services produced within a country in a year (chapter 26)
GDP per capita: GDP divided by population (chapter 26)
gross national product (GNP): the market value of all finished goods and services produced by a country’s citizens, wherever located, in a year (chapter 26)
nominal GDP: gross domestic product not adjusted for changes in prices
nominal variables: variables, such as nominal GDP, that have not been adjusted for changes in prices (chapter 26)
real variables: variables such as real GDP, that have been adjusted for changes in prices by using the same set of prices in all time periods (chapter 26)
recession: a significant, widespread decline in real income and employment (chapter 26)
business fluctuations (business cycles): the short-run movements in real GDP around its long-term trend (chapter 26)
consumption: private spending on finished goods and services (chapter 26)
investment: the purchase of new capital goods
government purchases: spending by all levels of government on finished goods and services not including transfers (chapter 26)
net exports: the value of exports minus the value of imports (chapter 26)
economic growth: the growth rate of real GDP per capita: g t = (Y t - Y {t-1})/Y {t-1})*100%, where Y t is real per capita GDP in period t (chapter 27)
physical capital: the stock of tools including machines, structures, and equipment (chapter 27)
human capital: tools of the mind: the productive knowledge and skills that workers acquire through education, training, and experience (chapter 27)
technological knowledge: knowledge about how the world works that is used to produce goods and services (chapter 27)
institutions: the 'rules of the game' that structure economic incentives (chapter 27)
free rider: someone who consumes the benefits of a public good without paying a share of the costs (chapter 27)
economies of scale: the advantages of large-scale production that reduce average cost as quantity increases (chapter 27)
saving: income that is not spent on consumption goods (chapter 29)
investment: the purchase of new capital goods: private spending on tools, plant, and equipment used to produce future output (chapter 29)
time preference: the desire to have goods and services sooner rather than later (all else being equal) (chapter 29)
market for loanable funds: the market where suppliers of loanable funds (savers) trade with demanders of loanable funds (borrowers), thereby determining the equilibrium interest rate (chapter 29)
financial intermediary: institutions such as banks, bond markets, and stock markets that reduce the costs of moving funds from savers to borrowers and investors (chapter 29)
bond: a sophisticated IOU that documents who owes how much and when payment must be made (chapter 29)
collateral: something of value that helps to secure a loan: if the borrower defaults, ownership of the collateral transfers to the lender (chapter 29)
crowding out: the decrease in private consumption and investment that occurs when government borrows more --- also, the decrease in private spending that occurs when government increases spending (chapter 29)
arbitrage: the practice of taking advantage of price differences for the same good in different markets by buying low in one market and selling high in another market (chapter 29)
stock (or share): a certificate of ownership in a corporation (chapter 29)
initial public offering (IPO): the first instance of a corporation selling stock to the public in order to raise capital (chapter 29)
owner's equity: the value of the asset minus the debt (chapter 29)
leverage ratio: the ratio of debt to equity, D/E (chapter 29)
insolvent bank or institution: a bank or institution whose liabilities are greater in value than its assets
unemployed: adults who do not have a job but who are looking for work (chapter 30)
unemployment rate: he percentage of the labor force who are unemployed (chapter 30)
labor force participation rate: the percentage of adults in the labor force (chapter 30)
discouraged workers: jobless individuals who have given up looking for work but who would still like to find a job (chapter 30)
frictional unemployment: short-term unemployment caused by the ordinary difficulties of matching employee to employer (chapter 30)
structural unemployment: persistent, long-term unemployment caused by long-lasting shocks or permanent features of an economy that make it more difficult for some workers to find jobs (chapter 30)
median wage: the wage such that one-half of all workers earn wages below that amount and one-half of all workers earn wages above that amount (chapter 30)
union: an association of workers that bargains collectively with employers over wages, benefits, and working conditions (chapter 30)
active labor market policies: policies that focus on getting unemployed workers back to work, such as job-search assistance, job-retraining programs, and work tests (chapter 30)
cyclical unemployment: unemployment correlated with the business cycle (chapter 30)
natural unemployment rate: the rate of structural plus frictional unemployment (chapter 30)
baby boomers: people born during the high-birth-rate years of 1946–1964 (chapter 30)
inflation: an increase in the general or average level of prices (chapter 31)
inflation rate: =((P 2 - P 1)/P 1)*100%, the percentage increase in the average level of prices (as measured by a price index) over a period of time (chapter 31)
real price: a price that has been corrected for inflation, used to compare the prices of goods over time (chapter 31)
v, velocity of money: the average number of times a dollar is spent on finished goods and services in a year (chapter 31)
deflation: a decrease in the average level of prices, that is, a negative inflation rate (chapter 31)
disinflation: a reduction in the inflation rate (chapter 31)
money illusion: the false perception that occurs when people mistake changes in nominal prices for changes in real prices (chapter 31)
real rate of return: the nominal rate of return minus the inflation rate (chapter 31)
nominal rate of return: the rate of return that does not account for inflation (chapter 31)
Fisher effect: the tendency of nominal interest rates to rise one to one with expected inflation rates (chapter 31)
monetizing the debt: the result of government paying off its debts by printing money (chapter 31)
business fluctuations (or business cycles): the short-run movements in real GDP around its long-term trend (chapter 32)
recession: a significant, widespread decline in real income and employment (chapter 32)
aggregate demand curve (AD): curve that shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth (% growth rate of M + % growth rate of v)
Solow growth rate: an economy's potential growth rate, the rate of economic growth that would occur given flexible prices and the existing real factors of production (chapter 32)
long-run aggregate supply curve (LRAS): a vertical line at the Solow growth rate (chapter 32)
real shock: (also called a productivity shock) any shock that increases or decreases the potential growth rate (chapter 32)
aggregate demand shock: a rapid and unexpected shift in the AD curve (spending) (chapter 32)
short-run aggregate supply curve (SRAS): curve that shows the positive relationship between the inflation rate and real growth during the period when prices and wages are sticky (chapter 32)
nominal wage confusion: situation that occurs when workers respond to their nominal wage instead of to their real wage, that is, when workers respond to the wage number on their paychecks rather than to what their wage can buy in goods and services (the real wage) (chapter 32)
menu costs: the costs of changing prices (chapter 32)
money: a widely accepted means of payment (chapter 34)
liquid asset: an asset that can be used for payments or, quickly and without loss of value, be converted into an asset that can be used for payments (chapter 34)
fractional reserve banking: a system in which banks hold only a portion of deposits in reserve, lending the rest (chapter 34)
reserve ratio (RR): the ratio of reserves to deposits (chapter 34)
money multiplier (MM): the amount the money supply expands with each dollar increase in reserves: MM=1/RR where RR is the reserve ratio (chapter 34)
open market operations: the buying and selling of government bonds by the central bank (chapter 34)
interbank rate (in U.S.: Federal Funds rate): the overnight lending rate from one major bank to another (chapter 34)
zero lower bound: situation in which the interbank rate (U.S.: Federal Funds rate) is close to zero (chapter 34)
quantitative easing: situation that occurs when the central bank buys longer-term government bonds or other securities (chapter 34)
liquidity trap: situation in which interest rates are close to the zero lower bound, so pushing them lower is not possible or not effective at increasing aggregate demand (chapter 34)
insolvent institution: an institution (or a bank) whose liabilities are greater in value than its assets (chapter 34)
illiquid asset: an asset that cannot be quickly converted into cash without a large loss in value. Note that a bank could be illiquid but not insolvent (chapter 34)
systemic risk: the risk that the failure of one financial institution can bring down other institutions (chapter 34)
moral hazard: the idea that people who are insulated from risk will tend to take on more risk (chapter 34)
disinflation: a reduction in the inflation rate (chapter 35)
deflation: a decrease in the average level of prices, that is, a negative inflation rate (chapter 35)
credible monetary policy: when market participants expect that the central bank will stick with its policy (chapter 35)
market confidence: one of a central bank’s most powerful tools is its influence over expectations, not its influence over the money supply (chapter 35)
fiscal policy: federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations (chapter 37)
crowding out: the decrease in private consumption and investment that occurs when government borrows more. Also, the decrease in private spending that occurs when government increases spending (chapter 37)
multiplier effect: the additional increase in spending caused by the initial increase in government spending (chapter 37)
Ricardian equivalence: the theory according to which people understand that, for a given level of government spending, lower taxes today mean higher taxes in the future and therefore save the money from a tax cut to pay future taxes (chapter 37)
automatic stabilizers: changes in fiscal policy that stimulate AD in a recession without the need for explicit action by policymakers. Unemployment insurance is one example of an automatic stabilizer (chapter 37)
counter-cyclical fiscal policy: fiscal policy that runs opposite or counter to the business cycle --- spending more when the economy is in a recession and less when the economy is booming (chapter 37)
trade deficit: the annual difference that results when the value of a country’s imports exceeds the value of its exports (chapter 38)
trade surplus: the annual difference that results when the value of a country’s exports exceeds the value of its imports (chapter 38)
balance of payments: a yearly summary of all the economic transactions between residents of one country and residents of the rest of the world capital surplus (chapter 38)
current account: in the balance of payments, the sum of the balance of trade, net income on capital held abroad, and net transfer payments (chapter 38)
capital account: in the balance of payments, the account that measures changes in foreign ownership of domestic assets, including financial assets like stocks and bonds as well as physical assets (chapter 38)
exchange rate: the price of one currency in terms of another currency (chapter 38)
appreciation: an increase in the price of one currency in terms of another currency (chapter 38)
depreciation: a decrease in the price of a currency in terms of another currency (chapter 38)
nominal exchange rate: the rate at which you can exchange one currency for another (chapter 38)
real exchange rate: the rate at which you can exchange the goods and services of one country for the goods and services of another (chapter 38)
purchasing power parity (PPP) theorem: the principle that the real purchasing power of money should be about the same, whether it is spent at home or converted into another currency and spent abroad (chapter 38)
law of one price: the principle that if trade were free, then identical goods will sell for about the same price throughout the world (chapter 38)
floating exchange rate: an exchange rate determined primarily by market forces (chapter 38)
fixed, or pegged, exchange rate: an exchange rate based on the promise of a government or central bank to convert its currency into another currency at a fixed (set) rate (chapter 38)
dollarization: a foreign country’s use of the U.S. dollar as its currency (chapter 38)
dirty, or managed, float: a currency whose value is not fixed but for which governments will intervene extensively in the market to keep its value within a certain range (chapter 38)