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Class:ECO 2013 - Principles of Macroeconomics
Subject:Economics
University:University of Central Florida
Term:Fall 2009
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Scarcity the limited nature of society's resources.
Economics the study of how society manages its scarce resources.
Efficiency the property of society getting the most it can from its scarce resources.
Equality the property of distributing economic prosperity uniformly among the members of society.
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Opportunity Cost whatever must be given up to obtain some item.
Rational People people who systematically and purposefully do the best they can to achieve their objectives.
Marginal Changes small incremental adjustments to a plan of action.
Incentive something that induces a person to act.
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Market Economy an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
Property Rights the ability of an individual to own and exercise control over scarce resources.
Market Failure a situation in which a market left on its own fails to allocate resources efficiently.
Externality the impact of one person's actions on the well being of a bystander.
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Market Power the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.
Productivity the quantity of goods and services produced from each unit of labor input.
Inflation an increase in the overall level of prices in the economy.
Business Cycle fluctuations in economic activity, such as employment and production.
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Circular-flow Diagram a visual model of the economy that shows how dollars flow through markets among households and firms.
Production Possibilities Frontier a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
Microeconomics the study of how households and firms make decisions and how they interact in markets.
Macroeconomics the study of economy-wide phenomena including inflation, unemployment, and economic growth.
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Positive Statements claims that attempt to describe the world as it is.
Normative Statements claims that attempt to prescribe how the world should be.
Absolute Advantage the ability to produce a good using fewer inputs than another producer.
Comparative Advantage the ability to produce a good at a lower opportunity cost than another producer.
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Imports goods produced abroad and sold domestically.
Exports goods produced domestically and sold abroad.
Market a group of buyers and sellers of a particular good or service.
Competitive Market a market in which there are many buyers and many sellers so that each has a negligible impact on the market price.
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Quantity Demanded the amount of a good that buyers are willing and able to purchase.
Law of Demand the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises.
Demand Schedule a table that shows the relationship between the price of a good and the quantity demanded.
Demand Curve a graph of the relationship between the price of a good and quantity demanded.
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Normal Good a good for which, other things equal, an increase in income leads to an increase in demand.
Inferior Good a good for which, other things equal, an increase in income leads to a decrease in demand.
Substitutes two goods for which an increase in the price of one leads to an increase in the demand for the other.
Complements two goods for which an increase in the price of one leads to a decrease in the demand for the other.
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Quantity Supplied the amount of a good that sellers are willing and able to sell.
Law of Supply the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises.
Supply Schedule a table that shows the relationship between the price of a good and the quantity supplied.
Supply Curve a graph of the relationship between the price of a good and the quantity supplied.
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Equilibrium a situation in which the market rice has reached the level at which the quantity supplied equals quantity demanded
Equilibrium Price the price that balances quantity suppplied and quantity demanded.
Equilibrium Quantity the quantity supplied and the quantity demanded at the equilibrium price.
Surplus a situation in which quantity supplied is greater than quantity demanded.
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Shortage a situation in which quantity demanded is greater than quantity supplied.
Law of Supply and Demand the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for the good into balance.
Price Ceiling a legal maximum on the price at which a good can be sold.
Price Floor a legal minimum on the price at which a good can be sold.
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Tax Incidence the manner in which the burden of a tax is shared among participants in a market.
Gross Domestic Product (GDP) the market value of all final goods and services produced within a country in a given period of time.
Consumption spending by households on goods and services with the exception of purchases of new housing.
Investment spending on capital equipment, inventories, and structures, including household purchases of new housing.
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Government Purchases spending on goods and services by local, state, and federal governments.
Net Exports spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports).
Nominal GDP the production of goods and services valued at current prices.
Real GDP the production of goods and services valued at constant prices.
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GDP Deflator a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.
Consumer Price Index (CPI) a measure of the overall cost of the goods and services bought by a typical consumer.
Inflation Rate the percentage change in the price index from the preceding period.
Producer Price Index a measure of the cost of a basket of goods and services bought by firms.
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Indexation the automatic correction by law or contract of a dollar amount for the effects of inflation.
Nominal Interest Rate the interest rate as usually reported without a correction for the effects of inflation
Real Interest Rate the interest rate corrected for the effects of inflation.
Productivity the quantity of goods and services produced from each unit of labor input.
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Physical Capital the stock of equipment and structures that are used to produce goods and services.
Human Capital the knowledge and skills that workers acquire through education, training, and experience.
Natural Resources the inputs into the production of goods an services that are provided by nature, such as land, rivers, and mineral deposits.
Technological Knowledge Society's understanding of the best ways to produce goods and services.
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Diminishing Returns the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases.
Catch-up Effect the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich.
Financial System the group of institutions in the economy that help to match one person's saving with another person's investment.
Financial Markets financial institutions through which savers can directly provide funds to borrowers.
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Bond a certificate of indebtedness.
Stock a claim to partial ownership in a firm.
Financial Intermediaries financial institutions through which savers can indirectly provide funds to borrowers.
Mutual Fund an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds.
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National Saving the total income in the economy that remains after paying for consumption and government purchase.
Private Saving the income that households have left after paying for taxes after paying for its spending.
Public Saving the tax revenue that the government has left after paying for its spending.
Budget Surplus an excess of tax revenue over government spending.
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Budget Deficit a shortfall of tax revenue from government spending.
Market for Loanable Funds the market in which those who want to save supply funds and those who want to borrow to invest demand funds.
Crowding Out a decrease in investment that results from government borrowing.
Labor Force the total number of workers, including both the employed and the unemployed.
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Unemployment Rate the percentage of the labor force that is unemployed.
Labor-force Participation Rate the percentage of the adult population that is in the labor force.
Natural Rate of Unemployment the normal rate of unemployment around which the unemployment rate fluctuates.
Cyclical Unemployment the deviation of unemployment from its natural rate.
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Discouraged Workers individuals who would like to work but have given up looking for a job.
Frictional Unemployment unemployment that results because ti takes time for workers to search for the jobs that best suit their tastes and skills.
Structural Unemployment unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.
Job Search the process by which workers find appropriate jobs given their tastes and skills.
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Unemployment Insurance a government program that partially protects workers' incomes when they become unemployed.
Union a worker association that bargains with employers over wages, benefits, and working conditions.
Collective Bargaining the process by which unions and firms agree on the terms of employment.
Strike the organized withdrawal of labor from a firm by a union.
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Efficiency Wages above-equilibrium wages paid by firms to increase worker productivity.
Money the set of assets in an economy that people regularly use to boy goods and services from other people.
Medium of Exchange an item that buyers give to sellers when they want to purchase goods and services.
Unit of Account the yardstick people use to post prices and record debts.
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Store of Value an item that people can use to transfer purchasing power from the present to the future.
Liquidity the ease with which an asset can be converted into the economy's medium of exchange.
Commodity Money money that tkaes the form of a commodity with intrinsic value.
Fiat Money money without intrinsic value that is used as money because of government decree.
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Currency the paper bills and coins in the hands of the public.
Demand Deposits balances in bank accounts that depositors can access on demand by writing a check.
Federal Reserve (Fed) the central bank of the United States
Central Bank an institution designed to oversee the banking system and regulate the quantity of money in the economy.
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Money Supply the quantity of money available in the economy.
Monetary Policy the setting of the money supply by policy makers in the central bank.
Reserves deposits that banks have received buy have not loaned out.
Fractional-reserve Banking a banking system in which banks hold only a fraction of deposits as reserves.
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Reserve Ratio the fraction of deposits that banks hold as reserves.
Money Multiplier the amount of money the banking system generates with each dollar of reserves.
Open-market Operations the purchase and sale of U.S. government bonds by the Fed.
Reserve Requirements regulations on the minimum amount of reserves that banks must hold against deposits.
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Discount Rate the interest rate on the loans that the Fed makes to banks.
Federal Funds Rate the interest rate at which banks make overnight loans to one another.
Quantity Theory of Money a theory asserting that the quantity of money available determines the price level and the growth rate in the quantity of money available determines the inflation rate.
Nominal Variables variables measured in monetary units.
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Real Variables variables measured in physical units.
Classical Dichotomy the theoretical separation of nominal and real variables.
Monetary Neutrality the proposition that changes in the money supply do not affect real variables.
Velocity of Money the rate at which money changes hands.
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Quantity Equation the equation M x V = P x Y relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services.
Inflation Tax the revenue the government raises by creating money.
Fisher Effect the one-for-one adjustment of the nominal interst rate to the inflation rate.
Shoeleather Costs the resources wasted when inflation encourages people to reduce their money holdings.
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Menu Costs the costs of changing prices.
Closed Economy an economy that does not interact with other economies in the world.
Open Economy an economy that interacts freely with other economies around the world.
Net Exports the value of a nation's exports minus the value of its imports; also called trade balance.
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Trade Surplus an excess of exports over imports.
Trade Deficit an excess of imports over exports.
Balanced Trade a situation in which exports equal imports.
Net Capital Outflow the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.
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Nominal Exchange Rate the rate at which a person can trade the currency of one country for the currency of another.
Appreciation an increase in teh value of a currency as measured by the amoutn of foreign currency it can buy.
Depreciation a decrease in the value of a currency as measured by the amount of foreign currency it can buy.
Real Exchange Rate the rate at which a person can trade the goods and services of one country for the goods and service of another.
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Purchasing-Power Parity a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries.
Recession a period of declining real incomes and rising unemployment.
Depression a severe recession.
Model of Aggregate Demand and Aggregate Supply the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend.
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Aggregate-Demand Curve a curve that shows the quantity of goods and services that households, firms, then government, and customers abroad want to buy at each price level.
Aggregate-Supply Curve a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level.
Natural Rate of Output the production of goods and services that an economy achieves in the long run when unemployment is at its normal rate.
Stagflation a period of falling output and rising prices.
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Theory of Liquidity Preference Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance.
Fiscal Policy the setting of the level of government spending and taxation by government policy-makers.
Multiplier Effect the additional shirts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending.
Crowding-out Effect the offset in aggregate demand that results when expansionary fiscal policy raises that interest rate and thereby reduces investment spending.
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Automatic Stabilizers changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policy-makers having to take andy deliberate action.
Phillips Curve a curve that shows the short-run trade-off between inflation and unemployment.
Natural-rate Hypothesis the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation.
Supply Shock an event that directly alters firms' costs and prices, shifting the economy;s aggregate supply curve and thus the Phillips curve.
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Sacrifice Ratio the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point.
Rational Expectations the theory that people optimally use all the information they have, including information about government policies, when forecasting the future.
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 Scarcitythe limited nature of society's resources.
 Economicsthe study of how society manages its scarce resources.
 Efficiencythe property of society getting the most it can from its scarce resources.
 Equalitythe property of distributing economic prosperity uniformly among the members of society.
 Opportunity Costwhatever must be given up to obtain some item.
 Rational Peoplepeople who systematically and purposefully do the best they can to achieve their objectives.
 Marginal Changessmall incremental adjustments to a plan of action.
 Incentivesomething that induces a person to act.
 Market Economyan economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
 Property Rightsthe ability of an individual to own and exercise control over scarce resources.
 Market Failurea situation in which a market left on its own fails to allocate resources efficiently.
 Externalitythe impact of one person's actions on the well being of a bystander.
 Market Powerthe ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.
 Productivitythe quantity of goods and services produced from each unit of labor input.
 Inflationan increase in the overall level of prices in the economy.
 Business Cyclefluctuations in economic activity, such as employment and production.
 Circular-flow Diagrama visual model of the economy that shows how dollars flow through markets among households and firms.
 Production Possibilities Frontiera graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
 Microeconomicsthe study of how households and firms make decisions and how they interact in markets.
 Macroeconomicsthe study of economy-wide phenomena including inflation, unemployment, and economic growth.
 Positive Statementsclaims that attempt to describe the world as it is.
 Normative Statementsclaims that attempt to prescribe how the world should be.
 Absolute Advantagethe ability to produce a good using fewer inputs than another producer.
 Comparative Advantagethe ability to produce a good at a lower opportunity cost than another producer.
 Importsgoods produced abroad and sold domestically.
 Exportsgoods produced domestically and sold abroad.
 Marketa group of buyers and sellers of a particular good or service.
 Competitive Marketa market in which there are many buyers and many sellers so that each has a negligible impact on the market price.
 Quantity Demandedthe amount of a good that buyers are willing and able to purchase.
 Law of Demandthe claim that, other things equal, the quantity demanded of a good falls when the price of the good rises.
 Demand Schedulea table that shows the relationship between the price of a good and the quantity demanded.
 Demand Curvea graph of the relationship between the price of a good and quantity demanded.
 Normal Gooda good for which, other things equal, an increase in income leads to an increase in demand.
 Inferior Gooda good for which, other things equal, an increase in income leads to a decrease in demand.
 Substitutestwo goods for which an increase in the price of one leads to an increase in the demand for the other.
 Complementstwo goods for which an increase in the price of one leads to a decrease in the demand for the other.
 Quantity Suppliedthe amount of a good that sellers are willing and able to sell.
 Law of Supplythe claim that, other things equal, the quantity supplied of a good rises when the price of the good rises.
 Supply Schedulea table that shows the relationship between the price of a good and the quantity supplied.
 Supply Curvea graph of the relationship between the price of a good and the quantity supplied.
 Equilibriuma situation in which the market rice has reached the level at which the quantity supplied equals quantity demanded
 Equilibrium Pricethe price that balances quantity suppplied and quantity demanded.
 Equilibrium Quantitythe quantity supplied and the quantity demanded at the equilibrium price.
 Surplusa situation in which quantity supplied is greater than quantity demanded.
 Shortagea situation in which quantity demanded is greater than quantity supplied.
 Law of Supply and Demandthe claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for the good into balance.
 Price Ceilinga legal maximum on the price at which a good can be sold.
 Price Floora legal minimum on the price at which a good can be sold.
 Tax Incidencethe manner in which the burden of a tax is shared among participants in a market.
 Gross Domestic Product (GDP)the market value of all final goods and services produced within a country in a given period of time.
 Consumptionspending by households on goods and services with the exception of purchases of new housing.
 Investmentspending on capital equipment, inventories, and structures, including household purchases of new housing.
 Government Purchasesspending on goods and services by local, state, and federal governments.
 Net Exportsspending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports).
 Nominal GDPthe production of goods and services valued at current prices.
 Real GDPthe production of goods and services valued at constant prices.
 GDP Deflatora measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.
 Consumer Price Index (CPI)a measure of the overall cost of the goods and services bought by a typical consumer.
 Inflation Ratethe percentage change in the price index from the preceding period.
 Producer Price Indexa measure of the cost of a basket of goods and services bought by firms.
 Indexationthe automatic correction by law or contract of a dollar amount for the effects of inflation.
 Nominal Interest Ratethe interest rate as usually reported without a correction for the effects of inflation
 Real Interest Ratethe interest rate corrected for the effects of inflation.
 Productivitythe quantity of goods and services produced from each unit of labor input.
 Physical Capitalthe stock of equipment and structures that are used to produce goods and services.
 Human Capitalthe knowledge and skills that workers acquire through education, training, and experience.
 Natural Resourcesthe inputs into the production of goods an services that are provided by nature, such as land, rivers, and mineral deposits.
 Technological KnowledgeSociety's understanding of the best ways to produce goods and services.
 Diminishing Returnsthe property whereby the benefit from an extra unit of an input declines as the quantity of the input increases.
 Catch-up Effectthe property whereby countries that start off poor tend to grow more rapidly than countries that start off rich.
 Financial Systemthe group of institutions in the economy that help to match one person's saving with another person's investment.
 Financial Marketsfinancial institutions through which savers can directly provide funds to borrowers.
 Bonda certificate of indebtedness.
 Stocka claim to partial ownership in a firm.
 Financial Intermediariesfinancial institutions through which savers can indirectly provide funds to borrowers.
 Mutual Fundan institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds.
 National Savingthe total income in the economy that remains after paying for consumption and government purchase.
 Private Savingthe income that households have left after paying for taxes after paying for its spending.
 Public Savingthe tax revenue that the government has left after paying for its spending.
 Budget Surplusan excess of tax revenue over government spending.
 Budget Deficita shortfall of tax revenue from government spending.
 Market for Loanable Fundsthe market in which those who want to save supply funds and those who want to borrow to invest demand funds.
 Crowding Outa decrease in investment that results from government borrowing.
 Labor Forcethe total number of workers, including both the employed and the unemployed.
 Unemployment Ratethe percentage of the labor force that is unemployed.
 Labor-force Participation Ratethe percentage of the adult population that is in the labor force.
 Natural Rate of Unemploymentthe normal rate of unemployment around which the unemployment rate fluctuates.
 Cyclical Unemploymentthe deviation of unemployment from its natural rate.
 Discouraged Workersindividuals who would like to work but have given up looking for a job.
 Frictional Unemploymentunemployment that results because ti takes time for workers to search for the jobs that best suit their tastes and skills.
 Structural Unemploymentunemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.
 Job Searchthe process by which workers find appropriate jobs given their tastes and skills.
 Unemployment Insurancea government program that partially protects workers' incomes when they become unemployed.
 Uniona worker association that bargains with employers over wages, benefits, and working conditions.
 Collective Bargainingthe process by which unions and firms agree on the terms of employment.
 Strikethe organized withdrawal of labor from a firm by a union.
 Efficiency Wagesabove-equilibrium wages paid by firms to increase worker productivity.
 Moneythe set of assets in an economy that people regularly use to boy goods and services from other people.
 Medium of Exchangean item that buyers give to sellers when they want to purchase goods and services.
 Unit of Accountthe yardstick people use to post prices and record debts.
 Store of Valuean item that people can use to transfer purchasing power from the present to the future.
 Liquiditythe ease with which an asset can be converted into the economy's medium of exchange.
 Commodity Moneymoney that tkaes the form of a commodity with intrinsic value.
 Fiat Moneymoney without intrinsic value that is used as money because of government decree.
 Currencythe paper bills and coins in the hands of the public.
 Demand Depositsbalances in bank accounts that depositors can access on demand by writing a check.
 Federal Reserve (Fed)the central bank of the United States
 Central Bankan institution designed to oversee the banking system and regulate the quantity of money in the economy.
 Money Supplythe quantity of money available in the economy.
 Monetary Policythe setting of the money supply by policy makers in the central bank.
 Reservesdeposits that banks have received buy have not loaned out.
 Fractional-reserve Bankinga banking system in which banks hold only a fraction of deposits as reserves.
 Reserve Ratiothe fraction of deposits that banks hold as reserves.
 Money Multiplierthe amount of money the banking system generates with each dollar of reserves.
 Open-market Operationsthe purchase and sale of U.S. government bonds by the Fed.
 Reserve Requirementsregulations on the minimum amount of reserves that banks must hold against deposits.
 Discount Ratethe interest rate on the loans that the Fed makes to banks.
 Federal Funds Ratethe interest rate at which banks make overnight loans to one another.
 Quantity Theory of Moneya theory asserting that the quantity of money available determines the price level and the growth rate in the quantity of money available determines the inflation rate.
 Nominal Variablesvariables measured in monetary units.
 Real Variablesvariables measured in physical units.
 Classical Dichotomythe theoretical separation of nominal and real variables.
 Monetary Neutralitythe proposition that changes in the money supply do not affect real variables.
 Velocity of Moneythe rate at which money changes hands.
 Quantity Equationthe equation M x V = P x Y relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services.
 Inflation Taxthe revenue the government raises by creating money.
 Fisher Effectthe one-for-one adjustment of the nominal interst rate to the inflation rate.
 Shoeleather Coststhe resources wasted when inflation encourages people to reduce their money holdings.
 Menu Coststhe costs of changing prices.
 Closed Economyan economy that does not interact with other economies in the world.
 Open Economyan economy that interacts freely with other economies around the world.
 Net Exportsthe value of a nation's exports minus the value of its imports; also called trade balance.
 Trade Surplusan excess of exports over imports.
 Trade Deficitan excess of imports over exports.
 Balanced Tradea situation in which exports equal imports.
 Net Capital Outflowthe purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.
 Nominal Exchange Ratethe rate at which a person can trade the currency of one country for the currency of another.
 Appreciationan increase in teh value of a currency as measured by the amoutn of foreign currency it can buy.
 Depreciationa decrease in the value of a currency as measured by the amount of foreign currency it can buy.
 Real Exchange Ratethe rate at which a person can trade the goods and services of one country for the goods and service of another.
 Purchasing-Power Paritya theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries.
 Recessiona period of declining real incomes and rising unemployment.
 Depressiona severe recession.
 Model of Aggregate Demand and Aggregate Supplythe model that most economists use to explain short-run fluctuations in economic activity around its long-run trend.
 Aggregate-Demand Curvea curve that shows the quantity of goods and services that households, firms, then government, and customers abroad want to buy at each price level.
 Aggregate-Supply Curvea curve that shows the quantity of goods and services that firms choose to produce and sell at each price level.
 Natural Rate of Outputthe production of goods and services that an economy achieves in the long run when unemployment is at its normal rate.
 Stagflationa period of falling output and rising prices.
 Theory of Liquidity PreferenceKeynes's theory that the interest rate adjusts to bring money supply and money demand into balance.
 Fiscal Policythe setting of the level of government spending and taxation by government policy-makers.
 Multiplier Effectthe additional shirts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending.
 Crowding-out Effectthe offset in aggregate demand that results when expansionary fiscal policy raises that interest rate and thereby reduces investment spending.
 Automatic Stabilizerschanges in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policy-makers having to take andy deliberate action.
 Phillips Curvea curve that shows the short-run trade-off between inflation and unemployment.
 Natural-rate Hypothesisthe claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation.
 Supply Shockan event that directly alters firms' costs and prices, shifting the economy;s aggregate supply curve and thus the Phillips curve.
 Sacrifice Ratiothe number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point.
 Rational Expectationsthe theory that people optimally use all the information they have, including information about government policies, when forecasting the future.
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