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ing (I) is the sum of the expenditures of central direction. (p. 50)
the country earn in the forms of wages,
business firms on new plant and equip-
Medium of exchange The medium of interest, rents, and profits. It includes in-
ment and households on new homes. Fi-
exchange is the object or objects used to direct business taxes, but excludes trans-
nancial “investments” are not included,
buy and sell other items such as goods fer payments and makes no deduction
nor are resales of existing physical assets.
and services. (p. 244) for income taxes. (p. 155, 170)
(p. 155)
Mercantilism Mercantilism is a doctrine National income accounting The system
Invisible hand The invisible hand is a
that holds that exports are good for a coun- of measurement devised for collecting and
phrase used by Adam Smith to describe
try, whereas imports are harmful. (p. 348) expressing macroeconomic data is called
how, by pursuing their own self-interests,
national income accounting. (p. 168)
people in a market system are “led by Mixed economy A mixed economy is
an invisible hand” to promote the well- one with some public influence over the Natural rate of unemployment The econ-
being of the community. (p. 56) workings of free markets. There may also omy™s self-correcting mechanism always
be some public ownership mixed in with tends to push the unemployment rate
Labor force The labor force is the number
private property. (p. 36) back toward a specific rate of unemploy-
of people holding or seeking jobs. (p. 108)
ment that we call the natural rate of unem-
Monetarism Monetarism is a mode of
Labor productivity Labor productivity ployment. (p. 323)
analysis that uses the equation of ex-
is the amount of output a worker turns
change to organize and analyze macro- Near moneys Near moneys are liquid as-
out in an hour (or a week, or a year) of
economic data. (p. 281) sets that are close substitutes for money.
labor. If output is measured by GDP, it is
(p. 247)
GDP per hour of work. (p. 107) Monetary policy Monetary policy refers
Net exports Net exports, or X 2 IM, is the
to actions taken by the Federal Reserve to
Law of supply and demand The law of
difference between exports (X) and im-
influence aggregate demand by changing
supply and demand states that in a free
ports (IM). It indicates the difference
interest rates. (pp. 97, 261, 301)
market the forces of supply and demand
between what we sell to foreigners and
generally push the price toward the level Monetize the deficit The central bank is what we buy from them. (pp. 155, 380)
at which quantity supplied and quantity said to monetize the deficit when it pur-
demanded are equal. (p. 66) Net national product (NNP) Net na-
chases bonds issued by the government.
tional product (NNP) is a measure of pro-
(p. 309)
Liability A liability of an individual or
duction. NNP is conceptually identical to
business firm is an item of value that the Money Money is the standard object national income. However, in practice,
individual or firm owes. Many liabilities used in exchanging goods and services. national income accountants estimate in-
are known as debts. (p. 251) In short, money is the medium of ex- come and production independently; and
change. (p. 244)
Liquidity An asset™s liquidity refers to so the two measures are never precisely
the ease with which it can be converted equal. (p. 170)
Money-fixed asset A money-fixed asset
into cash. (p. 247) is an asset whose value is a fixed number Net worth Net worth is the value of all
of dollars. (p. 162)
M1 The narrowly defined money sup- assets minus the value of all liabilities.
ply, usually abbreviated M1, is the sum of (p. 252)
Money multiplier The money multiplier
all coins and paper money in circulation, is the ratio of newly created bank de- Nominal GDP Nominal GDP is calcu-
plus certain checkable deposit balances at posits to new reserves. (p. 256) lated by valuing all outputs at current
banks and savings institutions. (p. 247)
prices. (p. 88)
Moral hazard Moral hazard refers to the
M2 The broadly defined money supply, tendency of insurance to discourage poli- Nominal rate of interest The nominal
usually abbreviated M2, is the sum of all cyholders from protecting themselves rate of interest is the percentage by which
coins and paper money in circulation, from risk. (p. 250) the money the borrower pays back ex-
plus all types of checking account bal-
ceeds the money that was borrowed,
Multinational corporations Multinational
ances, plus most forms of savings ac-
making no adjustment for any decline in
corporations are corporations, generally
count balances, plus shares in money
the purchasing power of this money that
large ones, which do business in many
market mutual funds. (p. 247)
results from inflation. (p. 121)
countries. Most, but not all, of these corpo-
Marginal propensity to consume (MPC) rations have their headquarters in devel- On-the-job training On-the-job training
The marginal propensity to consume oped countries. (p. 147) refers to skills that workers acquire while
(MPC) is the ratio of changes in con-
at work, rather than in school or in formal
Multiplier The multiplier is the ratio of
sumption relative to changes in dispos-
vocational training programs. (p. 141)
the change in equilibrium GDP (Y) divided
able income that produce the change in



Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:
Glossary 409



Open economy An open economy is one output that can be produced from given sarily correct, are the best that can be
that trades with other nations in goods inputs (such as labor and capital), given made given the available data. Rational
and services, and perhaps also trades in the available technology. (p. 108) expectations, therefore, cannot err sys-
financial assets. (pp. 24, 379) tematically. If expectations are rational,
Production indifference map A produc- forecasting errors are pure random num-
Open-market operations Open-market tion indifference map is a graph whose bers. (p. 328)
operations refer to the Fed™s purchase or axes show the quantities of two inputs
sale of government securities through that are used to produce some output. A Ray through the origin (or Ray) Lines
transactions in the open market. (p. 265) curve in the graph corresponds to some whose Y-intercept is zero have so many
given quantity of that output, and the special uses in economics and other disci-
Opportunity cost The opportunity cost different points on that curve show the plines that they have been given a special
of some decision is the value of the next different quantities of the two inputs that name: a ray through the origin, or a ray.
best alternative that must be given up are just enough to produce the given out- (p. 16)
because of that decision (for example, put. (p. 18)
working instead of going to school). Real GDP Real GDP is calculated by
(pp. 4, 41) Production possibilities frontier The valuing outputs of different years at com-
production possibilities frontier is a mon prices. Therefore, real GDP is a far
Optimal decision An optimal decision is curve that shows the maximum quanti- better measure than nominal GDP of
one that best serves the objectives of the ties of outputs it is possible to produce changes in total production. (p. 88)
decision maker, whatever those objec- with the available resource quantities
tives may be. It is selected by explicit or Real GDP per capita Real GDP per
and the current state of technological
implicit comparison with the possible al- capita is the ratio of real GDP divided by
knowledge. (p. 43)
ternative choices. The term optimal con- population. (p. 92)
notes neither approval nor disapproval Productivity Productivity is the amount
Real rate of interest The real rate of in-
of the objective itself. (p. 42) of output produced by a unit of input.
terest is the percentage increase in pur-
(p. 202)
Origin (of a graph) The “0” point in the chasing power that the borrower pays to
lower-left corner of a graph where the Progressive tax A progressive tax is one the lender for the privilege of borrowing.
axes meet is called the origin. Both vari- in which the average tax rate paid by an It indicates the increased ability to pur-
ables are equal to zero at the origin. individual rises as income rises. (p. 35) chase goods and services that the lender
(p. 13) earns. (p. 121)
Property rights Property rights are laws
Outputs The outputs of a firm or an and/or conventions that assign owners Real wage rate The real wage rate is
economy are the goods and services it the rights to use their property as they the wage rate adjusted for inflation.
produces. (pp. 22, 42, 105) see fit (within the law)”for example, to Specifically, it is the nominal wage di-
sell the property and to reap the benefits vided by the price index. The real wage
Phillips curve A Phillips curve is a graph (such as rents or dividends) while they thus indicates the volume of goods and
depicting the rate of unemployment on the own it. (p. 140) services that the nominal wages will
horizontal axis and either the rate of infla-
buy. (p. 117)
tion or the rate of change of money wages Purchasing power The purchasing power
on the vertical axis. Phillips curves are nor- of a given sum of money is the volume of Recession A recession is a period of time
mally downward sloping, indicating that goods and services that it will buy. (p. 117) during which the total output of the
higher inflation rates are associated with economy declines. (pp. 24, 87)
Quantity demanded The quantity de-
lower unemployment rates. (p. 319)
manded is the number of units of a good Recessionary gap The recessionary gap
Potential GDP Potential GDP is the real that consumers are willing and can afford is the amount by which the equilibrium
GDP that the economy would produce if to buy over a specified period of time. level of real GDP falls short of potential
its labor and other resources were fully (p. 57) GDP. (pp. 183, 205)
employed. (p. 108)
Relative price An item™s relative price is
Quantity supplied The quantity sup-
its price in terms of some other item
Price ceiling A price ceiling is a maxi- plied is the number of units that sellers
rather than in terms of dollars. (p. 119)
mum that the price charged for a com- want to sell over a specified period of
modity cannot legally exceed. (p. 70) time. (p. 61)
Required reserves Required reserves are
the minimum amount of reserves (in cash
Price floor A price floor is a legal mini- Quantity theory of money The quantity
or the equivalent) required by law. Nor-
mum below which the price charged for theory of money assumes that velocity is
mally, required reserves are proportional
a commodity is not permitted to fall. (approximately) constant. In that case,
to the volume of deposits. (p. 251)
(p. 73) nominal GDP is proportional to the
money stock. (p. 279)
Research and development (R&D) Re-
Principle of increasing costs The princi-
search and development (R&D) is the
ple of increasing costs states that as the Quota A quota specifies the maximum
activity of firms, universities, and gov-
production of a good expands, the oppor- amount of a good that is permitted into
ernment agencies that seeks to invent
tunity cost of producing another unit the country from abroad per unit of time.
new products and processes and to im-
generally increases. (p. 44) (p. 348)
prove those inventions so that they are
Production function The economy™s Rational expectations Rational expecta- ready for the market or other users.
production function shows the volume of tions are forecasts that, while not neces- (p. 142)



Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:
Glossary
410



Resources Resources are the instruments line or, as it is often said, the ratio of the slow growth (or decline) of aggregate
provided by nature or by people that “rise” over the “run.” (p. 14) supply. (p. 318)
are used to create goods and services.
Surplus A surplus is an excess of quan-
Specialization Specialization means that
Natural resources include minerals, soil,
tity supplied over quantity demanded.
a country devotes its energies and re-
water, and air. Labor is a scarce resource,
When there is a surplus, sellers cannot
sources to only a small proportion of the
partly because of time limitations (the day
sell the quantities they desire to supply at
world™s productive activities. (p. 341)
has only 24 hours) and partly because the
the current price. (p. 65)
number of skilled workers is limited. Fac- Stabilization policy Stabilization policy
tories and machines are resources made Tangent A tangent to the curve is straight
is the name given to government pro-
by people. These three types of resources line that touches, but does not cut, the
grams designed to prevent or shorten re-
are often referred to as land, labor, and cap- curve at a particular point. (p. 15)
cessions and to counteract inflation (that
ital. They are also called inputs or factors of is, to stabilize prices). (p. 99)
Tariff A tariff is a tax on imports. (p. 348)
production. (p. 40)
Stagflation Stagflation is inflation that
Theory A theory is a deliberate simplifi-
Revaluation A revaluation is an increase occurs while the economy is growing
cation of relationships used to explain
in the official value of a currency. (p. 363) slowly (“stagnating”) or in a recession.
how those relationships work. (p. 9)
(pp. 96, 210, 318)
Run on a bank A run on a bank occurs
Trade adjustment assistance Trade ad-
when many depositors withdraw cash Store of value A store of value is an item
justment assistance provides special un-
from their accounts all at once. (p. 242) used to store wealth from one point in
employment benefits, loans, retraining
time to another. (p. 244)
Scatter diagram A scatter diagram is a programs, and other aid to workers and
graph showing the relationship between firms that are harmed by foreign compe-
Strategic argument for protection The
two variables (such as consumer spend- tition. (p. 351)
strategic argument for protection holds
ing and disposable income). Each year is that a nation may sometimes have to
Trade deficit A country™s trade deficit is
represented by a point in the diagram, threaten protectionism to induce other
the excess of its imports over its exports.
and the coordinates of each year™s point countries to drop their own protectionist
If, instead, exports exceed imports, the
show the values of the two variables in measures. (p. 353)
country has a trade surplus. (p. 387)
that year. (p. 158)
Structural budget deficit or surplus
Trade surplus A country™s trade surplus
Self-correcting mechanism The econ- The structural budget deficit or surplus
is the excess of its exports over its im-
omy™s self-correcting mechanism refers is the hypothetical deficit or surplus we
ports. If, instead, imports exceed exports,
to the way money wages react to either a would have under current fiscal policies
the country has a trade deficit. (p. 387)
recessionary gap or an inflationary gap. if the economy were operating near full
Wage changes shift the aggregate supply employment. (p. 306) Transfer payments Transfer payments
curve and therefore change equilibrium are sums of money that the government
Structural unemployment Structural un-
GDP and the equilibrium price level. gives certain individuals as outright
employment refers to workers who have
(pp. 209, 322) grants rather than as payments for serv-
lost their jobs because they have been dis-
ices rendered to employers. Some com-

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