Mankiw, Principles of Economics (Ch. 29, 30, 31, 32, 33 & 34)

money

the set of assets in an economy that people regularly use to buy 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

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 takes the form of a commodity with intrinsic value

fiat money

money without intrinsic value that is used as money because of government decree

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

money supply

the quantity of money available in the economy

monetary policy

the setting of the money supply by policymakers in the central bank

reserves

deposits that banks have received but have not loaned out

fractional-reserve banking

a banking system in which banks hold only a fraction of deposits as reserves

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

bank capital

the resources a bank's owners have to put into the institution

leverage

the use of borrowed money to supplement existing funds for purposes of investment

leverage ratio

the ratio of assets to bank capital

capital requirement

a government regulation specifying a minimum amount of bank capital

open-market operations

the purchase and sale of U.S. government bonds by the Fed

discount rate

the interest rate on the loans that the Fed makes to banks

reserve requirements

regulations on the minimum amount of reserves that banks must hold against deposits

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 that the growth rate in the quantity of money available determines the inflation rate

nominal variables

variables measured in monetary units

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

quantity equation

the equation M × V = P × 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 interest rate to the inflation rate

shoeleather costs

the resources wasted when inflation encourages people to reduce their money holdings

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

exports

goods and services that are produced domestically and sold abroad

imports

goods and services that are produced abroad and sold domestically

net exports

the value of a nation's exports minus the value of its imports; also called the trade balance

trade balance

the value of a nation's exports minus the value of its imports; also called net exports

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

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 the value of a currency as measured by the amount 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 services of another

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

trade policy

a government policy that directly influences the quantity of goods and services that a country imports or exports

capital flight

a large and sudden reduction in the demand for assets located in a country

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

aggregate-demand curve

a curve that shows the quantity of goods and services that households, firms, the 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

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 policymakers

multiplier effect

the additional shifts 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 the interest rate and thereby reduces investment spending

automatic stabilizers

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action