Course glossary
During lectures you will learn new words. Using this link you are welcome to add them to our "course glossary", so that other students will be able to see them and learn. Let's make our own useful glossary and help each other to learn new words! By the way, there are already some worlds which should be familiar for you till the end of the course, try to cover them when you mill have free time.
Special | A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z | ALL
A |
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Absolute (or money) pricesThe price of a good measured in units of currency. | |
Absolute AdvantageExists if a producer can produce more of a good than all other producers. | |
Aggregate Income (AI)The sum of all income earned by suppliers of resources in the economy. AI=GDP. | |
Aggregate Spending (GDP)The sum of all spending from four sectors of the economy. GDP = C+I+G+Xn. | |
Aggregate Supply (AS)The positive relationship between the level of domestic output produced and the avg. price level of that output. | |
AggregationThe process of summing the microeconomic activity of households and firms into a more macroeconomic measure of economic activity. | |
All else equalTo predict how a change in one variable affects a second, we hold all other variables constant. This is also referred to as the “ceteris paribus” assumption. | |
Allocative efficiencyProduction of the combination of goods and services that provides the most net benefit to society. | |
Appreciating (depreciating) currencyWhen the value of a currency is rising (falling) relative to another currency, it is said to be appreciating (depreciating) | |
Asset demandThe amount of money demanded as an asset. As nominal interest rates rise, the oc of holding money begins to rise and you are more likely to lesson your asset d for money. | |
Asset of a bankAnything owned by the bank or owed to the bank. | |
Automatic stabilizersMechanisms built into the tax system that automatically regulate, or stabilize, the macroeconomy as it moves through the business cycle by changing net taxes collected by the government. These stabilizers increase a deficit during a recessionary period and increase a budget surplus during an inflationary period, without any discretionary change on the part of the government. | |
Autonomous consumptionThe amount of consumption that occurs no matter the level of disposable income. In a linear consumption function, this shows up as a constant and graphically it appears as the y intercept. | |
Autonomous investmentThe level of investment determined by investment demand. It is autonomous because it is assumed to be constant at all levels of gdp. | |
Autonomous savingThe amount of saving that occurs no matter the level of disposable income. In a linear saving function, this shows up as a constant and graphically it appears as the y intercept. | |
Average tax rateThe proportion of total income paid to taxes. It is calculated by dividing the total taxes owed by the total taxable income. | |
B |
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Balance of payments statementA summary of the payments received by the u.s. from foreign countries and the payments sent by the u.s. to foreign countries. | |
Balance sheetA tabular way to show the assets and liabilities of a bank. | |
Base yearThe year that serves as a reference point for constructing a price index and comparing real values over time. | |
BondA certificate of indebtedness from the issuer to the bond holder. | |
Budget deficitExists when government spending exceeds the revenue collected from taxes. | |
Budget surplusExists when government spending is less than revenue collected from taxes. | |
Business cycleThe periodic rise and fall (in four phases) of economic activity. | |
C |
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Capital accountThis account shows the flow of investment on real or financial assets between a nation and foreigners. | |
Circular flow of economic activityA model that shows how households and firms circulate resources, goods and incomes though the economy. This basic model is expanded to include the g and foreign sector. | |
Closed economyA model that assumes there is no foreign sector (m and x). | |
Comparative advantageA producer has comparative advantage if he can produce a good at lower opportunity cost than all other producers. | |
Consumer price index (CPI).The price index that measures the average price level of the items in the base year market basket. This is the main measure of consumer inflation. | |
Consumption and savings schedulesTables that show the direct relationships between disposable income and consumption and saving. | |
Consumption functionA linear relationship showing how increases in disposable income cause increases in consumption. | |
ContractionThe period where real gdp is falling. | |
Contractionary fiscal policyDecreases in government spending or higher net taxes meant to shift the aggregate expenditure function downward and shift ad to the left. | |
Contractionary monetary policyDesigned to avoid inflation by decreasing ad, which lowers the pl and gdpr. | |
Crowding out effectWhen the government borrows funds to cover a deficit, the interest rate increases and households and firms are pushed out of the market for loanable funds. | |
Current accountThis account shows current import and export payments of both goods and services and investment income sent to foreign investors of u.s. and investment income received by u.s. citizens who invest abroad. | |
D |
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Debt financingA firm’s way of raising investment funds by issuing bonds to the public. | |
Decision to investA firm invests in projects so long as the real expected real rate of return is greater than the i. | |
DeflationA sustained falling pl, usually due to weakened ad and a constant as. | |
Demand curveA graphical depiction of the d schedule. | |
Demand for loanable fundsThe negative relationship between the real interest rate and the dollars invested by firms. | |
Demand scheduleA table showing qd for a good at various prices. | |
Demand-pull inflationThis inflation is the result of stronger c from all sectors of ad as it continues to increase in the upward sloping range of as. The pl begins to rise and inflation is felt in the economy. | |
DepressionA prolonged, deep contraction in the business cycle. | |
Determinates of ADAD is a function of the four components of domestic spending (cigxx) if any of these components increases or decreases, holding the others constant, ad shifts right or left. | |
Determinates of ASAS is a function of many factors that impact the production capacity of the nation. If these factors make it easier, or less costly, for a nation to produce, as shifts to the right. If these factors make it more difficult, or more costly, for a nation to produce, then as shifts to the left. | |
Determinates of consumption and savingFactors that shift the consumption and saving functions in the opposite direction are wealth, expectations, and household debt. The factors that change consumption and saving in the same direction are taxes and transfers. | |
Determinates of demandThe external factors that shift d to the left or right. | |
Determinates of exchange ratesExternal factors that increase the price of one currency relative to another. | |
Discount rateThe i% commercial banks pay on short term loans from the FED. | |
Disposable incomeThe income a consumer has left over to spend or save once they have paid out their net taxes. | |
DissavingAnother way of saying that saving is less than zero. This can occur at low levels of disposable income when the consumer must liquidate assets or borrow to maintain consumption. | |
Domestic priceThe equilibrium price of a good in a nation without trade. | |
Double countingThe mistake of including the value of intermediate stages of production in GDP on top of the value of the final good. | |
E |
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Economic growthOccurs when an economy’s production possibilities increase. | |
EconomicsThe study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited material wants. | |
EgalitarianismThe philosophy that all citizens should receive an equal share of the economic resources. | |
Equation of exchangeThe equation says the gdp is equal to the q of money multiplied by the number of times each dollar is spent in a year. | |
Equity financingThe firm’s method of raising funds for investment by issuing shares of stock to the public. | |
Excess reservesThe portion of a deposit that may be borrow by customers. | |
Exchange rateThe price of one currency in terms of a second currency. | |
ExpansionA period where real GDP is growing. | |
Expansionary fiscal policyIncreases in government spending or lower net taxes meant to shift the aggregate expenditure function upward and shift ad to the right. | |
Expansionary monetary policyDesigned to fix a recession and increase AD, lower the u%, and increase GDP | |
Expected (anticipated) inflationThe inflation expected in a future time period. This expected inflation is added to the real interest rate to compensate for lost purchasing power. | |
Expected real rate of return.The rate of real profit the firm anticipates receiving on investment expenditures. This is the marginal benefit of an investment project. | |
F |
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Federal funds rateThe i% paid on short terms loans made from one bank to another. | |
Fiat moneyPaper and coin money used to make transactions because the government declares it to be legal tender. | |
Final goodsGoods that are ready for their final use by consumers and firms. | |
Fiscal policyDeliberate changes in government spending and net tax collection to affect economic output, unemployment, and the price level. Fiscal policy is typically designed to manipulate ad to “fix’ the economy. | |
Foreign sector substitution effectWhen the avg. Price of u.s. output increases, consumers naturally begin to look for similar items produced elsewhere. | |
Fractional reserve bankingA system in which only a fraction of the total money deposited in banks is held in reserve as currency. | |
Free rider problemIn the case of a public good, some members of the community know that they can consume the public good while others provide for it. | |
Functions of moneyMedium of exchange, store of value and unit of account. | |
G |
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GDP price deflatorThe price index that measures the average price level of the goods and services that make up GDP. | |
Gross domestic productThe market value of the final goods and services produced within a nation in a given year. | |
H |
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Human capitalThe amount of knowledge and skills that labor can apply to the work they do and the general level of health that the labor force enjoys. | |
I |
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Import quotaA limitation on the amount of a good that can be imported into the domestic market. | |
Income effectThe change in qd that results from a change in the consumer’s purchasing power (or real income) | |
Inferior goodsA good for which high income decreases D. | |
InflationThe percentage change in the cpi from one period to the next. | |
Inflationary gapThe amount by which equilibrium gdp exceeds full-employment GDP. | |
Interest rate effectIf the avg. Price level rises, consumers and firms might need to borrow more money for spending and capital investment, which increases the interest rate and delays current consumption. This postponement reduces current consumption of domestic production as the price level rises. | |
Intermediate goodsGoods that require further modification before they are ready for final use. | |
Investment demandThe inverse relationship between the real interest rate and the cumulative dollars invested. Like any demand curve, this is drawn with a negative slope. | |
Investment tax creditA reduction in taxes for firms that invest in new capital like a factory or piece of equipment. | |
L |
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Law of demandHolding all else equal, when the price of a good rises, consumers decrease their quantity demanded for that good. | |
Law of increasing costsThe more of a good that is produced, the greater the opportunity cost of producing the next unit of that good. | |
Liability of a bankAnything owned by depositors or lenders. | |
LiquidityA measure of how easily an asset can be converted to cash. | |
M |
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M1The most liquid of money definitions and the basis for all other more broadly defined measures of money. | |
Macroeconomic equilibriumOccurs when the Q of real output D is equal to the Q of real output supplied. Graphically this is at the intersection of AD and AS. | |
Macroeconomic long runA period of time long enough for input prices to have fully adjusted to market forces. In this period, all product and input markets are in a state of equilibrium and the economy is operating at fe. Once all markets in the economy have adjusted and there exists this long-run equilibrium, the as curve is vertical at GDPR. | |
Macroeconomic short runA period of time during which the prices of goods and services are changing their respective markets, but the input prices have not yet adjusted to those changes in the product markets. During the sr, the as curve has three stages – horizontal, upward sloping and vertical. | |
MarginalThe next unit or increment of an action. | |
Marginal analysisMaking decisions based up weighing the marginal benefits and costs of that action. | |
Marginal benefit (MB)additional benefit received from the consumption of the next unit of a good or service. | |
Marginal cost (MC)The additional cost incurred from the consumption of the next unit of a good or service. | |
Marginal productivity theoryThe philosophy that a citizen should receive a share of economic resources proportional to the marginal revenue product of his or her own productivity. | |
Marginal propensity to consume (MPC)The change in consumption caused by a change in disposable income, or the slope of the consumption function. MPC = ▲c/▲di. | |
Marginal propensity to save (MPS).The change in saving caused by a change in disposable income, or the slope of the saving function. MPS = ▲s/▲di | |
Marginal tax rateThe rate paid on the last dollar earned. This is found by taking the ratio of the change in taxes divided by the change in income. | |
Market basketA collection of goods and services used to represent what is consumed in the economy. | |
Market economy (capitalism)An economic system based upon the fundamentals of private property, freedom, self-interest, and prices. | |
Market for loanable fundsThe market for dollars that are available to be borrowed for investment projects. Equilibrium in this market is determined at the real interest rate where the dollars saved (supply) is equal to the dollars borrowed (demand). | |
Money demandThe D for money is the sum of money demanded for transactions and money demanded as an asset. It is inversely related to i%. | |
Money multiplierThis measures the maximum amount of new checking deposits that can be created by a single dollar of excess reserves. | |
Money supplyquantity of money in circulation as measured by the fed reserve asm1, m2 and m3. | |
N |
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Negative externalityExists when the production of a good imposes disutility (the spillover costs) upon third parties not directly involved in the consumption or production of this good. | |
Net export effectA rising interest rate increases foreign demand for u.s. dollars. The dollar then appreciates in value, causing net exports from the u.s. to fall. Falling net exports decreases ad, which lessens the impact of the expansionary fiscal policy. | |
Nominal GDPThe value of current production at the current prices. | |
Nominal incomeToday’s income measured in today’s dollars. These are dollars unadjusted by inflation. | |
Nominal rate of interestThe percentage increase in money that the borrower pays the lender and is equal to the real rate plus the expected inflation. | |
Nonmarket transactionsHousehold work or do-it-yourself jobs are missed by gdp accounting. The same is true of g transfer payments and purely financial transactions. | |
Non-renewable resourcesresources that cannot replenish themselves. Coal is a good example. | |
Normal goodsA good for which higher income increases D. | |
O |
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Official reserves accountThe FED’s adjustment of a deficit or surplus in the current and capital account by the addition or subtraction of foreign currencies so that the balance of payments is zero. | |
Open market operationsA tool of monetary policy, it involves the FED’s buying or selling of securities to or from commercial banks and the general public. | |
Opportunity costThe value of the sacrifice made to pursue a course of action. | |
P |
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PeakThe top of a business cycle where an expansion has ended. | |
Phillips curveA graphical device that shows the relationship between inflation and the unemployment rate. | |
Positive externalityExists when the production of a good creates utility (the spillover benefits) for third parties not directly involved in the consumption or production of that good. | |
Price indexmeasure of the average level of prices in a market basket for a given year, when compared to the prices in a reference (or base) year. | |
Private savingSaving conducted by households and equal to the difference between disposable income and consumption. | |
Production possibilitiesDifferent quantities of goods that an economy can produce with a given amount of scarce resources. | |
Productive efficiencyProduction of maximum output for a given level of technology and resources. All points on the ppf are productively efficient. | |
Productivityquantity of output that can be produced per worker in a given amount of time. | |
Progressive taxThe proportion of income paid in taxes rises as income rises. An example is the personal income tax. | |
Proportional taxA constant proportion of income is paid in taxes no matter the level of income. An example is a “flat tax” or the corporate income tax. | |
Protective tariffAn excise tax levied on a good that is produced in the domestic market so that it may be protected from foreign competition. | |
Public savingSaving conducted by government and equal to the difference between tax revenue collected and spending on goods and services. | |
Q |
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Quantity theory of moneyA theory that asserts that the q of money determines the pl and that the growth rate of money determines the rate of inflation. | |
R |
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Real GDPThe value of current production, but using prices from a fixed point in time. | |
Real incomeToday’s income measured in base year dollars. | |
Real rate of interestThe cost of borrowing to fund an investment. This can be thought of as the marginal cost of an investment project. | |
RecessionIn the AD and AS model, this is described as falling ad with a constant as curve. GDPR falls far below fe levels and the u% rises. | |
Recessionary gapThe amount by which full-employment gdp exceeds equilibrium GDP. | |
Regressive taxThe proportion of income paid in taxes decreases as income rises. An example is a sales tax. | |
Relative pricesThe number of units of any other good y that must be sacrificed to acquire the first good x. | |
Renewable resourcesNatural resources that can replenish themselves if they are not over-harvested. | |
Required reservesportion of a deposit that must be held at the bank for withdrawals. | |
Reserve ratioThe fraction of total deposits that must be kept on reserve. | |
ResourcesCalled factors of production, these are commonly grouped into the four categories of labor, physical capital, land or natural resources, and entrepreneurial ability. | |
Revenue tariffAn excise tax levied on goods not produced in the domestic market. | |
S |
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Saving functionA linear relationship showing how increases in disposable income cause increases in savings. | |
ScarcityThe imbalance between limited productive resources and unlimited human wants. Because economic resources are scarce, the goods and services a society can produce are also scarce. | |
Second hand salesFinal goods and services that are resold. Even if they are resold many times, final goods and services are only counted once, in the year in which they were produced. | |
SpecializationWhen firms focus their resources on production of goods for which they have comparative advantage, they are said to be specializing. | |
Spillover benefitsAdditional benefits to society, not captured by the market demand curve from the production of a good, resulting in a price that is too high and a market quantity that is too low. | |
Spillover costsAdditional to society, not captured by the market supply curve from the production of a good, result in a price that is too low and market quantity that is too high. | |
StagflationA situation in the macroeconomy when inflation and the unemployment rate are both increasing. | |
Sticky pricesIf price levels do not change, especially downward, with changes in ad, then prices are thought of as sticky or inflexible. Keynesians believe the price level does not usually fall with contractionary policy. | |
StockA certificate that represents a claim to, or share of, the ownership of a firm. | |
Substitute goodsTwo goods are consumer substitutes if they provide essentially the same utility to the consumer. | |
Substitution effectThe change in qdemanded resulting from a change in the price of one good relative to the price of other goods. | |
Supply of loanable fundsThe positive relationship between the dollars saved and the real interest rate. | |
Supply shocksA supply shock is an economy-wide phenomenon that affects the costs of firms, and the position of the as curve, either positively or negatively. | |
Supply side fiscal policyFiscal policy centered on tax reductions targeted to as so that gdpr increases with very little inflation. The main justification is that lower taxes on individuals and firms increase incentives to work, save, invest and take risks. | |
Supply-side boomWhen the as curve shifts outward and the ad curve stays constant, pl falls, gdpr increases and the unemployment rate falls. | |
T |
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Tax bracketA range of income on which a given marginal tax rate is applied. | |
TechnologyA nation’s knowledge of how to produce goods in the best possible way. | |
Theory of liquidity preferenceKeynes’ theory that the i% adjusts to bring the money market into equilibrium. | |
Trade-offsScarce resources imply that individuals, firms, and governments are constantly faced with difficult choices that involve benefits and costs. | |
Transaction demandThe amount of money held in order to make transactions. This is not related to the interest rate, but increases as nominal GDP increases. | |
TroughThe bottom of the business cycle where a contraction has stopped. | |
U |
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Underground economyinclude unreported illegal activity, bartering, or informal exchange of cash. | |
V |
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Velocity of moneyThe average number of times that a dollar is spent in a year. V is defined as pq/m. | |
W |
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Wealth effectAs the avg. Pl rises, the purchasing power of wealth and savings begins to fall. High prices therefore tend to reduce the quantity of domestic output purchased. | |
World priceThe global equilibrium price of a good when nations engage in trade. | |