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economics
economic
problem
economic
theory
The study of how individuals and societies
choose to use the scarce resources that nature and
previous generations have provided
Given scarce resources, how exactly do large,
complex societies go about answering the three
basic economic questions?
A statement or set of related statements about
cause and effect, action and reaction
microeconomi The branch of economics that examines the
cs
functioning of individual industries and the
behavior of individual decision-making units-that
is, business firms and households
macroThe branch of economics that examines the
economics
economic behavior of aggregates-income,
employment, output, and so on-on a national
scale
Great
The period of severe economic contraction and
Depression
high unemployment that began in 1929 and
continued throughout the 1930s
fine-tuning
The phrase used by Walter Heller to refer to the
government's role in regulating inflation and
unemployment
stagflation
Occurs when the overall price level rises rapidly
(inflation) during periods of recession or high
and persistent unemployment (stagnation).
laissez-faire
Literally from the French: "allow [them] to do."
economy
An economy in which individual people and
firms pursue their own self-interests without any
central direction or regulation
command
An economy in which a central government
economy
either directly or indirectly sets output targets,
incomes, and prices
consumer
The idea that consumers ultimately dictate what
sovereignty
will be produced (or not produced) by choosing
what to purchase (and what not to purchase)
price
The amount that a product sells for per unit. It
reflects what society is willing to pay
theory of
Ricardo's theory that specialization and free trade
comparative
will benefit all trading partners (real wages will
advantage
rise), even those that may be absolutely more (or
less) efficient producers
model
A formal statement of a theory, usually a
mathematical statement of a presumed
relationship between two or more variables
variable
A measure that can change from time to time or
from observation to observation
Ockham's
The principle that irrelevant detail should be cut
razor
away
positive
An approach to economics that seeks to
economics
understand behavior and the operation of systems
without making judgments. It describes what
exists and how it works.
normative
An approach to economics that analyzes
economics
outcomes of economic behavior, evaluates them
as good or bad, and may prescribe course of
action. Also called policy economics.
descriptive
The compilation of data that describe phenomena
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economics
empirical
economics
equity
efficiency
stability
economic
growth
opportunity
cost
sunk costs
ceteris
paribus, or all
else equal
efficient
market
Industrial
Revolution
capital
outputs
resources or
inputs
input or factor
markets
labor market
capital market
land market
three basic
questions
producers
production
factors of
production
and facts
The collection and use of data to test economic
theories
Fairness
The condition in which the economy is
producing what people want at least possible cost
A condition in which output is steady or
growing, with low inflation and full employment
of resources
An increase in the total output of an economy. It
occurs when a society acquires new resources or
when it learns to produce more using existing
resources
The best alternative that we forgo, or give up,
when we make a choice or a decision
Costs that cannot be avoided, regardless of what
is done in the future, because they have already
been incurred
A device used to analyze the relationship
between two variables while the values of other
variables are held unchanged
A market in which profit opportunities are
eliminated almost instantaneously.
The period in England during the late eighteenth
and early nineteenth centuries in which new
manufacturing technologies and improved
transportation gave rise to the modern factory
system and a massive movement of the
population from the countryside to the cities
Those goods produced by the economic system
that are used as inputs to produce other goods
and services
Usable products
Anything provided by nature or previous
generations that can be used directly or indirectly
to satisfy human wants
The markets in which the resources used to
produce products are exchanged
The input factor market in which households
supply work for wages to firms that demand
labor
The market in which households supply their
savings to firms that demand funds to buy capital
goods
The input/factor market in which households
supply land or other real property in exchange
for rent
The three basic questions that all societies must
answer: What will be produced? How will it be
produced? Who will get what is produced?
Those people or groups of people, whether
private or public, who transform resources into
usable products
The process by which resources are transformed
into useful forms
The inputs into the production process. Land,
Labor, and capital are the three key factors of
production
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product or
output markets
quantity
demanded
The markets in which goods and services are
exchanged
The amount (number of units) of a product that a
household would buy in a given period if it could
buy all it wanted at the current market price
demand curve A graph illustrating how much of a given product
a household would be willing to buy at different
prices
law of demand The negative relationship between price and
quantity demanded: As price rises, quantity
demanded decreases. As price falls, quantity
demanded increases
shift of a
The change that takes place in a demand curve
demand curve corresponding to a new relationship between
quantity demanded of a good and price of that
good. The shift is brought about by a change in
the original conditions
movement
The change in quantity demanded brought about
along a
by a change in price.
demand curve
market
The sum of all the quantities of a good or service
demand
demanded per period by all the households
buying in the market for that good or service.
aggregate
The total demand for goods and services in an
demand
economy
consumer
Goods produced for present consumption
goods
normal goods Goods for which demand goes up when income
is higher and for which demand goes down when
income is lower
inferior goods Goods for which demand tends to fall when
income rises
substitutes
Goods that can serve as replacements for one
another; when the price of one increase, demand
for the other goes up
perfect
Identical products
substitutes
complements, Goods that "go together"; a decrease in the price
complementar of one results in an increase in demand for the
y goods
other, and vice versa
investment
The process of using resources to produce new
capital. New capital additions to a firms capital
stock. Although capital is measured at a given
point in time (a stock), investment is measured
over a period of time (a flow). The flow of
investment increases the capital stock
production
A graph that shows all the combinations of goods
possibility
and services that can be produced if all of
frontier (ppf)
society's resources are used efficiently
marginal rate The slope of the production possibility frontier
of
(ppf).
transformation
(MRT)
firm
An organization that comes into being when a
person or a group of people decides to produce a
good or service to meet a perceived demand.
Most firms exist to make a profit
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entrepreneur
households
income
wealth or net
worth
wealth or net
worth
profit
quantity
supplied
supply
schedule
law of supply
supply curve
market supply
aggregate
supply
equilibrium
excess demand
or shortage
excess demand
or shortage
excess supply
or surplus
price rationing
price ceiling
queuing
favored
customers
ration coupons
black market
inflation
hyperinflation
A person who organizes, manages, and assumes
the risk of a firm, taking a new idea or a new
product and turning it into successful business
The consuming units in an economy
The sum of all a household's wages, salaries,
profits, interest payments, rents, and other forms
of earnings in a given period of time. It is a flow
measure
The total value of what a household owns minus
what it owes. It is a stock measure
The total value of what a household owns minus
what it owes. It is a stock measure
The excess of revenues over cost in a given
period
The amount of a particular product that a firm
would be willing and able to offer for sale at a
particular price during a given time period
A table showing how much of a product firms
will supply at different prices
The positive relationship between price and
quantity of a good supplied: An increase in
market price will lead to an increase in quantity
supplied, and a decrease in market price will lead
to a decrease in quantity supplied
A graph illustrating how much of a product a
firm will supply a different price
The sum of all that is supplied each period by all
producers of a single product
The total supply of goods and services in an
economy
The condition that exists when quantity supplied
and quantity demanded are equal. At
equilibrium, there is no tendency for price to
change
The condition that exists when quantity
demanded exceeds quantity supplied at the
current price
The condition that exists when quantity
demanded exceeds quantity supplied at the
current price
The condition that exists when quantity supplied
exceeds quantity demanded at the current price
The process by which the market system
allocates goods and services to consumers when
quantity demanded exceeds quantity supplied
A maximum price that sellers may charge for a
good, usually set by government
Waiting in line as a means of distributing goods
and services; a nonprice rationing mechanism
Those who receive special treatment from
dealers during situations of excess demand
Tickets or coupons that entitle individuals to
purchase a certain amount of a given product per
month
A market in which illegal trading takes place at
market-determined prices
An increase in the overall price level
A period of very rapid increases in the overall
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price level
The cycle of short-term ups and downs in the
economy
aggregate
The total quantity of goods and services
output
produced (or supplied) in an economy in a given
period
recession
Period during which aggregate output declines.
Conventionally, a period in which aggregate
output declines for two consecutive quarters
depression
A prolonged and deep recession
expansion or
The period in the business cycle from a trough
boom
up to a peak, during which output and
employment rise
contraction,
The period in the business cycle from a peak
recession, or
down to a trough, during which output and
slump
employment fall
unemployment The percentage of the labor force that is
rate
unemployed
fiscal policy
Government policies concerning taxes and
expenditures
monetary
The tools used by the Federal Reserve to control
policy
the money supply
supply-side
Government policies that focus on stimulating
policies
aggregate supply instead of aggregate demand.
circular flow
A diagram showing the income received and
payments made by each sector of the economy
transfer
Cash payments made by the government to
payments
people who do not supply goods, services, or
labor in exchange for these payments. They
include social security benefits, veterans'
benefits, and welfare payments
Treasury
Promissory notes issued by the federal
bonds, notes, government when it borrows money
and bills
corporate
Promissory notes issued by corporations when
bonds
they borrow money
shares of stock Financial instruments that give to the holder a
share in the firm's ownership and therefore the
right to share in the firm's profits
dividends
The portion of a corporation's profits that the
firm pays out each period to its shareholders
national
Data collected and published by the government
income and
describing the various components of national
product
income and output in the economy
accounts
gross domestic The total market value of all final goods and
product (GDP) services produced within a given period by
factors of production located within a country
final goods
Goods and services produced for final use
and services
intermediate
Goods that are produced by one firm for use in
goods
further processing by another firm
value added
The difference between the value of goods as
they leave a stage of production and the cost of
the goods as they entered that stage
gross national The total market value of all final goods and
product (GNP) services produced within a given period by
factors of production owned by a country's
business cycle
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expenditure
approach
income
approach
personal
consumption
expenditures
(C)
durable goods
citizens, regardless of where the output is
produced
A method of computing GDP that measures the
amount spent on all final goods during a given
period
A method of computing GDP that measures the
income—wages, rents, interest, and profits—
received by all factors of production in producing
final goods
A major component of GDP: expenditures by
consumers on goods and services
Goods that last a relatively long time, such as
cars and household appliances
nondurable
Goods that are used up fairly quickly, such as
goods
food and clothing
services
The things we buy that do not involve the
production of physical things, such as legal and
medical services and education
gross private
Total investment in capital—that is, the purchase
domestic
of new housing, plants, equipment, and inventory
investment (I) by the private (or nongovernment) sector
nonresidential Expenditures by firms for machines, tools,
investment
plants, and so on
residential
Expenditures by households and firms on new
investment
houses and apartment buildings
change in
The amount by which firms' inventories change
business
during a period. Inventories are the goods that
inventories
firms produce now but intend to sell later
depreciation
The amount by which an asset's value falls in a
given period
gross
The total value of all newly produced capital
investment
goods (plant, equipment, housing, and inventory)
produced in a given period
net investment Gross investment minus depreciation
government
Expenditures by federal, state, and local
consumption
governments for final goods and services
and gross
investment (G)
net exports
The difference between exports (sales to
(EX - IM)
foreigners of U.S.-produced goods and services)
and imports (U.S. purchases of goods and
services from abroad). The figure can be positive
or negative
national
The total income earned by the factors of
income
production owned by a country's citizens
compensation Includes wages, salaries, and various
of employees supplements—employer contributions to social
insurance and pension funds, for example—paid
to households by firms and by the government
proprietors'
The income of unincorporated businesses
income
corporate
The income of corporate businesses
profits
rental income The income received by property owners in the
form of rent
indirect taxes Taxes like sales taxes, customs duties, and
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subsidies
license fees
Payments made by the government for which it
receives no goods or services in return
Payments of factor income to the rest of the
world minus the receipt of factor income from
the rest of the world
net factor
payments to
the rest of the
world
net national
Gross national product minus depreciation; a
product (NNP) nation's total product minus what is required to
maintain the value of its capital stock
personal
The total income of households. Equals (national
income
income) minus (corporate profits minus
dividends) minus (social insurance payments)
plus (interest income received from the
government and households) plus (transfer
payments to households). The income received
by households after paying social insurance taxes
but before paying personal income taxes
disposable
Personal income minus personal income taxes.
personal
The amount that households have to spend or
income or
save
after-tax
income
personal
The amount of disposable income that is left
saving
after total personal spending in a given period
personal
The percentage of disposable personal income
saving rate
that is saved. If the personal saving rate is low,
households are spending a large amount relative
to their incomes; if it is high, households are
spending cautiously
current dollars The current prices that one pays for goods and
services
nominal GDP Gross domestic product measured in current
dollars
weight
The importance attached to an item within a
group of items
base-year
The year chosen for the weights in a fixedweight procedure
fixed-weight
A procedure that uses weights from a given base
procedure
year
underground
The part of the economy in which transactions
economy
take place and in which income is generated that
is unreported and therefore not counted in GDP
per capita
A country's GDP or GNP divided by its
GDP or GNP population
employed
Any person 16 years old or older (1) who works
for pay, either for someone else or in his or her
own business for 1 or more hours per week, (2)
who works without pay for 15 or more hours per
week in a family enterprise, or (3) who has a job
but has been temporarily absent, with or without
pay
unemployed
A person 16 years old or older who is not
working, is available for work, and has made
specific efforts to find work during the previous
4 weeks
not in the
A person who is not looking for work, either
labor force
because he or she does not want a job or has
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given up looking
The number of people employed plus the number
of unemployed
unemployment The percentage of the labor force that is
rate
unemployed
labor-force
The ratio of the labor force to the total population
participation
16 years old or older
rate
discouragedThe decline in the measured unemployment rate
worker effect that results when people who want to work but
cannot find jobs grow discouraged and stop
looking, thus dropping out of the ranks of the
unemployed and the labor force
frictional
The portion of unemployment that is due to the
unemployment normal working of the labor market; used to
denote short-run job/skill matching problems
structural
The portion of unemployment that is due to
unemployment changes in the structure of the economy that
result in a significant loss of jobs in certain
industries
natural rate of The unemployment that occurs as a normal part
unemployment of the functioning of the economy. Sometimes
taken as the sum of frictional unemployment and
structural unemployment
cyclical
The increase in unemployment that occurs during
unemployment recessions and depressions
labor supply
A graph that illustrates the amount of labor that
curve
households want to supply at the particular wage
rate
labor demand A graph that illustrates the amount of labor that
curve
firms want to employ at the particular wage rate
sticky wages
The downward rigidity of wages as an
explanation for the existence of unemployment
social, or
Unspoken agreements between workers and
implicit,
firms that firms will not cut wages
contracts
relative-wage An explanation for sticky wages (and therefore
explanation of unemployment): If workers are concerned about
unemployment their wages relative to other workers in other
firms and industries, they may be unwilling to
accept a wage cut unless they know that all other
workers are receiving similar cuts
explicit
Employment contracts that stipulate workers’
contracts
wages, usually for a period of 1 to 3 years
cost-of-living Contract provisions that tie wages to changes in
adjustments
the cost of living. The greater the inflation rate,
(COLAs)
efficiency wage theory An explanation for
unemployment that holds that the productivity of
workers increases with the wage rate. If this is
so, firms may have an incentive to pay wages
above the market-clearing rate
efficiency
An explanation for unemployment that holds that
wage theory
the productivity of workers increases with the
wage rate. If this is so, firms may have an
incentive to pay wages above the market-clearing
rate
minimum
Laws that set a floor for wage rates—that is, a
wage laws
minimum hourly rate for any kind of labor
labor force
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inflation
deflation
sustained
inflation
NAIRU
An increase in the overall price level
A decrease in the overall price level
An increase in the overall price level that
continues over a significant period
The nonaccelerating inflation rate of
unemployment
inflation rate
The percentage change in the price level
consumer
A price index computed each month by the
price index
Bureau of Labor Statistics using a bundle that is
(CPI)
meant to represent the "market basket" purchased
monthly by the typical urban consumer
producer price Measures of prices that producers receive for
indexes (PPIs) products at all stages in the production process
real interest
The difference between the interest rate on a loan
rate
and the inflation rate
Phillips Curve A graph showing the relationship between the
inflation rate and the unemployment rate
velocity of
money
quantity
theory of
money
rationalexpectations
hypothesis
Lucas supply
function
price surprise
real business
cycle theory
Laffer curve
trade surplus
trade deficit
Corn Laws
absolute
advantage
comparative
The number of times a dollar bill changes hands,
on average, during a year; the ratio of nominal
GDP to the stock of money
The theory based on the identity M × The theory
based on the identity M × V = P × Y and the
assumption that the velocity of money (V) is
constant (or virtually constant).
The hypothesis that people know the "true
model" of the economy and that they use this
model to form their expectations of the future
The supply function embodies the idea that
output (Y) depends on the difference between the
actual price level and the expected price level
Actual price level minus expected price level
An attempt to explain business cycle fluctuations
under the assumptions of complete price and
wage flexibility and rational expectations. It
emphasizes shocks to technology and other
shocks
With the tax rate measured on the vertical axis
and tax revenue measured on the horizontal axis,
the Laffer curve shows there is some tax rate
beyond which the supply response is large
enough to lead to a decrease in tax revenue for
further increases in the tax rate
The situation when a country exports more than
it imports
The situation when a country imports more than
it exports
The tariffs, subsidies, and restrictions enacted by
the British Parliament in the early nineteenth
century to discourage imports and encourage
exports of grain
The advantage in the production of a product
enjoyed by one country over another when it
uses fewer resources to produce that product than
the other country does
The advantage in the production of a product
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advantage
enjoyed by one country over another when that
product can be produced at lower cost in terms of
other goods than it could be in the other country
terms of trade The ratio at which a country can trade domestic
products for imported products
exchange rate The ratio at which two currencies are traded. The
price of one currency in terms of another
factor
The quantity and quality of labor, land, and
endowments
natural resources of a country
HeckscherA theory that explains the existence of a
Ohlin theorem country's comparative advantage by its factor
endowments: A country has a comparative
advantage in the production of a product if that
country is relatively well endowed with inputs
used intensively in the production of that product
protection
The practice of shielding a sector of the economy
from foreign competition
tariff
A tax on imports
export
Government payments made to domestic firms to
subsidies
encourage exports
dumping
A firm or industry sells products on the world
market at prices below the cost of production
quota
A limit on the quantity of imports
SmootThe U.S. tariff law of the 1930s, which set the
Hawley tariff highest tariffs in U.S. history (60 percent). It set
off an international trade war and caused the
decline in trade that is often considered a cause
of the worldwide depression of the 1930s
General
An international agreement signed by the United
Agreement on States and 22 other countries in 1947 to promote
Tariffs and
the liberalization of foreign trade
Trade (GATT)
economic
Occurs when two or more nations join to form a
integration
free-trade zone
European
The European trading bloc composed of Austria,
Union (EU)
Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, Spain, Sweden, and the
United Kingdom
U.S.-Canadian An agreement in which the United States and
Free-Trade
Canada agreed to eliminate all barriers to trade
Agreement
between the two countries by 1998
North
An agreement signed by the United States,
American
Mexico, and Canada in which the three countries
Free-Trade
agreed to establish all North America as a freeAgreement
trade zone
(NAFTA)
foreign
All currencies other than the domestic currency
exchange
of a given country
balance of
The record of a country's transactions in goods,
payments
services, and assets with the rest of the world;
also the record of a country's sources (supply)
and uses (demand) of foreign exchange
balance of
A country's exports of goods and services minus
trade
its imports of goods and services
trade deficit
Occurs when a country's exports of goods and
services are less than its imports of goods and
services in a given period
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balance on
current
account
balance on
capital account
Net exports of goods, plus net exports of
services, plus net investment income, plus net
transfer payments
In the United States, the sum of the following
(measured in a given period): the change in
private U.S. assets abroad, the change in foreign
private assets in the United States, the change in
U.S. government assets abroad, and the change
in foreign government assets in the United States
The change in imports caused by a $1 change in
income
marginal
propensity to
import (MPM)
trade feedback The tendency for an increase in the economic
effect
activity of one country to lead to a worldwide
increase in economic activity, which then feeds
back to that country
price feedback The process by which a domestic price increase
effect
in one country can "feed back" on itself through
export and import prices. An increase in the price
level in one country can drive up prices in other
countries. This in turn further increases the price
level in the first country
floating, or
Exchange rates that are determined by the
marketunregulated forces of supply and demand
determined,
exchange rates
appreciation of The rise in value of one currency relative to
a currency
another
depreciation of The fall in value of one currency relative to
a currency
another
law of one
If the costs of transportation are small, the price
price
of the same good in different countries should be
roughly the same
purchasingA theory of international exchange holding that
power-parity
exchange rates are set so that the price of similar
theory
goods in different countries is the same
J-curve effect Following a currency depreciation, a country's
balance of trade may get worse before it gets
better. The graph showing this effect is shaped
like the letter J, hence the name "J-curve effect."
vicious-circle- Suggests that poverty is self-perpetuating
of-poverty
because poor nations are unable to save and
hypothesis
invest enough to accumulate the capital stock
that would help them grow
capital flight
The tendency for both human capital and
financial capital to leave developing countries in
search of higher rates of return elsewhere
brain drain
The tendency for talented people from
developing countries to become educated in a
developed country and remain there after
graduation
social
Basic infrastructure projects such as roads, power
overhead
generation, and irrigation systems
capital
import
An industrial trade strategy that favors
substitution
developing local industries that can manufacture
goods to replace imports
export
A trade policy designed to encourage exports
promotion
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International
Monetary
Fund
World Bank
structural
adjustment
fertility rate
mortality rate
natural rate of
population
increase
debt
rescheduling
stabilization
program
socialist
economy
capitalist
economy
communism
market–
socialist
economy
tragedy of
commons
shock therapy
economic
growth
modern
economic
growth
aggregate
production
function
An international agency whose primary goals are
to stabilize international exchange rates and to
lend money to countries that have problems
financing their international transactions
An international agency that lends money to
individual countries for projects that promote
economic development
A series of programs in developing nations
designed to (1) reduce the size of their public
sectors through privatization and/or expenditure
reductions, (2) decrease their budget deficits, (3)
control inflation, and (4) encourage private
saving and investment through tax reform
The birth rate. Equal to (the number of births per
year divided by the population) × 100
The death rate. Equal to (the number of deaths
per year divided by the population) × 100
The difference between the birth rate and the
death rate. It does not take migration into account
An agreement between banks and borrowers
through which a new schedule of repayments of
the debt is negotiated; often some of the debt is
written off and the repayment period is extended
An agreement between a borrower country and
the International Monetary Fund in which the
country agrees to revamp its economic policies to
provide incentives for higher export earnings and
lower imports
An economy in which most capital is owned by
the government instead of private citizens. Also
called social ownership
An economy in which most capital is privately
owned
An economic system in which the people control
the means of production (capital and land)
directly, without the intervention of a
government or state
An economy that combines government
ownership with market allocation
The idea that collective ownership may not
provide the proper private incentives for
efficiency because individuals do not bear the
full costs of their own decisions but do enjoy the
full benefits
The approach to transition from socialism to
market capitalism that advocates rapid
deregulation of prices, liberalization of trade, and
privatization
An increase in the total output of an economy.
Defined by some economists as an increase of
real GDP per capita
The period of rapid and sustained increase in real
output per capita that began in the Western
World with the Industrial Revolution
The mathematical representation of the
relationship between inputs and national output,
or gross domestic product
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labor
productivity
productivity of
an input
invention
innovation
consumer
sovereignty
fiscal policy
monetary
policy
discretionary
fiscal policy
net taxes (T)
disposable, or
after-tax,
income (Yd)
budget deficit
government
spending
multiplier
tax multiplier
Output per worker hour; the amount of output
produced by an average worker in 1 hour
The amount of output produced per unit of an
input
An advance in knowledge
The use of new knowledge to produce a new
product or to produce an existing product more
efficiently
The notion that people are free to choose, and
that things that people do not want will not sell.
"The customer rules."
The government's spending and taxing policies
The behavior of the Federal Reserve concerning
the nation's money supply
Changes in taxes or spending that are the result
of deliberate changes in government policy
Taxes paid by firms and households to the
government minus transfer payments made to
households by the government
Total income minus net taxes: Y - T
The difference between what a government
spends and what it collects in taxes in a given
period: G - T
The ratio of the change in the equilibrium level
of output to a change in government spending
The ratio of change in the equilibrium level of
output to a change in taxes
federal surplus Federal government receipts minus expenditures
(+) or deficit
(-)
federal debt
The total amount owed by the federal
government
automatic
Revenue and expenditure items in the federal
stabilizers
budget that automatically change with the state
of the economy in such a way as to stabilize
GDP
fiscal drag
The negative effect on the economy that occurs
when average tax rates increase because
taxpayers have moved into higher income
brackets during an expansion
fullWhat the federal budget would be if the economy
employment
were producing at a full-employment level of
budget
output
structural
The deficit that remains at full employment
deficit
cyclical deficit The deficit that occurs because of a downturn in
the business cycle
transaction
The main reason that people hold money—to
motive
buy things
nonsynchroniz The mismatch between the timing of money
ation of
inflow to the household and the timing of money
income and
outflow for household expenses
spending
speculation
One reason for holding bonds instead of money:
motive
Because the market value of interest-bearing
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bonds is inversely related to the interest rate,
investors may wish to hold bonds when interest
rates are high with the hope of selling them when
interest rates fall
tight monetary Fed policies that contract the money supply in an
policy
effort to restrain the economy
easy monetary Fed policies that expand the money supply in an
policy
effort to stimulate the economy
average
The proportion of income households spend on
propensity to
consumption. Determined by dividing
consume
consumption (C) by income (Y).
(APC)
life-cycle
A theory of household consumption: Households
theory of
make lifetime consumption decisions based on
consumption
their expectations of lifetime income
permanent
The average level of one's expected future
income
income stream
nominal wage The wage rate in current dollars
rate
real wage rate The amount that the nominal wage rate can buy
in terms of goods and services
nonlabor, or
Any income received from sources other than
nonwage,
working—inheritances, interest, dividends,
income
transfer payments, and so on
unconstrained The amount a household would like to work
supply of
within a given period at the current wage rate if it
labor
could find the work
constrained
The amount a household actually works in a
supply of
given period at the current wage rate
labor
inputs
The goods and services that firms purchase and
turn into output
plant-andPurchases by firms of additional machines,
equipment
factories, or buildings within a given period
investment
inventory
Occurs when a firm produces more output than it
investment
sells within a given period
labor-intensive A production technique that uses a large amount
technology
of labor relative to capital
capitalA production technique that uses a large amount
intensive
of capital relative to labor
technology
animal spirits A phrase coined by Keynes to describe investors'
of
feelings
entrepreneurs
accelerator
The tendency for investment to increase when
effect
aggregate output increases and decrease when
aggregate output decreases, accelerating the
growth or decline of output
excess labor,
Labor and capital that are not needed to produce
excess capital the firm's current level of output
adjustment
The costs that a firm incurs when it changes its
costs
production level—for example, the
administration costs of laying off employees or
the training costs of hiring new workers
desired, or
The level of inventory at which the extra cost (in
optimal, level lost sales) from lowering inventories by a small
of inventories amount is just equal to the extra gain (in interest
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productivity,
or labor
productivity
Okun's Law
revenue and decreased storage costs).
Output per worker hour; the amount of output
produced by an average worker in 1 hour
The theory, put forth by Arthur Okun, that the
unemployment rate decreases about 1 percentage
point for every 3 percent increase in real GDP.
Later research and data have shown that the
relationship between output and unemployment
is not as stable as Okun's "Law" predicts
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