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loanable funds market
a hypothetical market that brings together those who want to lend money and those who want to borrow money
rate of return
a project is the profit earned on the project expressed as a percentage of its cost
crowding out
occurs when a government deficit drives up the interest rate and leads to reduced investment spending
Fisher effect
an increase in expected future inflation drives up the nominal interest rate by the same number of percentage points, leaving the expected real interest rate unchanged
cyclically adjusted budget balance
an estimate of what the budget balance would be if real GDP were exactly equal to potential output
government debt
the accumulation of past budget deficits, minus past budget surpluses
fiscal year
runs from October 1 to September 30 and is labeled according to the calendar year in which it ends
public debt
government debt held by individuals and institutions outside the government
debt-GDP ratio
the government’s debt as a percentage of GDP
implicit liabilities
are spending promises made by governments that are effectively a debt despite the fact that they are effectively a debt despite the fact that they are not included in the usual debt statistics
target federal funds rate
a desired level for the federal fund rate set by the Fed through open market operations by moving the interest rate which shift the money supply curve
expansionary monetary policy
monetary policy that increases aggregate demand
contractionary monetary policy
monetary policy that reduces aggregate demand
Taylor rule for monetary policy
a rule for setting the federal funds rate that takes into account both the inflation rate and the output gap
inflation targeting
occurs when the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target
monetary neutrality
changes in the money supply have no real effects on the economy according to the concept of it
classical model of the price level
the real quantity of money is always at its long-run equilibrium level
inflation tax
a reduction in the value of money held by the value of money held by the public caused by inflation
cost-push inflation
inflation that is caused by significant increase in the price of an input with economy-wide importance
demand-pull inflation
inflation that is caused by an increase in aggregate demand
short-run Phillips curve
represents the negative short-run relationship between the unemployment rate and the inflation rate
nonaccelerating inflation rate of unemployment (NAIRU)
the unemployment rate at which inflation does not change over time
long-run Phillips curve
show the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience
debt deflation
the reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation
zero bound
it exists on the nominal rate: it cannot go below zero
liquidity trap
a situation in which conventional monetary policy is ineffective because nominal interest rates are up against the zero bound
keynesian economics
focuses on the ability of shifts in aggregate demand to influence aggregate output in the short run
macroeconomic policy activism
the use of monetary and fiscal policy to smooth out the business cycle
monetarism
asserts that GDP will grow steadily if the money supply grows steadily
discretionary monetary policy
the use of changes in the interest rate or the money supply by the central bank to stabilize the economy
monetary policy rule
a formula that determines the central bank’s actions
quantity theory of money
emphasizes the positive relationship between the price level and the money supply. It relies on the velocity equation (M x V = Px Y)
velocity of money
the ratio of nominal GDP to the money supply. It is a measure of the number of times the average dollar bill is spent per year
natural rate hypothesis
to avoid accelerating inflation over time, the unemployment rate must be high enough that the actual inflation rate equals the expected inflation rate
political business cycle
results when politicians use macroeconomic policy to serve political ends
new classical macroeconomics
an approach to the business cycle that returns to the classical view that shifts in the aggregate demand curve affect only the aggregate price level, not aggregate output
rational expectations
the view that individuals and firms make decisions optimally, using all available information
new Keynesian economics
market imperfections can lead to price stickiness for the economy as a whole
real business cycle theory
claims that fluctuations in the rate of growth of total factor productivity cause the business cycle
rule of 70
tells us that the time it takes a variable that grows gradually over time to double is approximately 70 divided by that variable’s annual growth rate
labor productivity (productivity)
output per worker
physical capital
consists of human-made goods such as buildings and machines used to produce other goods and services
human capital
is the improvement in labor created by the education and knowledge of members of the workforce
technology
the technical means for the production of goods and services
aggregate production function
a hypothetical function that shows how productivity (output per worker) depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology
diminishing returns to physical capital
an aggregate production function exhibits it when holding the amount of human capital per worker and the state of technology fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity
growth accounting
economists use this to estimate the contribution of each major factor in the aggregate production function to economic growth
total factor productivity
the amount of out put that can be achieved with a given amount of factor inputs
convergence hypothesis
international differences in real GDP per capita tend to narrow over time
research and development (R&D)
spending to create and implement new technologies
infrastructure
roads, power lines, ports, information networks, and other underpinnings for economic activity
sustainable
whether It can continue in the face of the limited supply of natural resources and the impact of growth on the environment d
depreciation
occurs when the value of an asset is reduced by wear, age, or obsolescence
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