mankiw type 1

accelerator model

the model according to which investment depends on change in output

accommodating policy

a policy that yields to the effect of a shock and thereby prevents the shock from being disruptive; for example, a policy that raises aggregate demand in response to an adverse supply shock, sustaining the effect of the shock on prices and keeping out put at its natural level

accounting profit

the amount of revenue remaining for the owners of a firm after all the factors of production except capital have been compensated

acyclical

moving in no consistent direction over the business cycle

adaptive expectations

an approach that assumes that people form their expectation of a variable based on recently observed values of the variable

adverse selection

an unfavorable sorting of individuals by their own choices; for example, in efficiency-wage theory, when a wage cut induces good workers to quit and bad workers to remain at a firm

aggregate

total for the whole economy

aggregate demand curve

the negative relationship between the price level and the aggregate quantity of output demanded that arises from the interaction between the goods market and the money market

aggregate-demand externality

the macroeconomic impact of one firm's price adjustment on the demand for all other firms' products

aggregate supply curve

the relationship between the price level and the aggregate quantity of output firms produce

animal spirits

exogenous and perhaps self-fulfilling waves of optimism and pessimism about the state of the economy that, according to some economists, influence the level of investment

appreciation

a rise in the value of a currency relative to other currencies in the market for foreign exchange

arbitrage

the act of buying an item in one market and selling it at a higher price in another market in order to profit from the price differential between the two marekts

automatic stabilizer

a policy that reduces the amplitude of economic fluctuations without regular and deliberate changes in economic policy; for example, an income tax system that automatically reduces taxes when income falls

average propensity to consume (APC)

the ratio of consumption to income

balance sheet

an accounting statement that shows assets and liabilities

balanced budget

a budget in which receipts equal expenditures

balanced trade

a situation in which the value of imports equals the value of exports, so net exports equal zero

Baumol-Tobin model

a model of money demand positing that people choose optimal money holdings by comparing the opportunity cost of the forgone interest from holding money and the benefit of making less trips to the bank

bond

a document representing an interest-bearing debt of the issuer, usually a corporation or the government

borrowing constraint

a restriction on the amount a person can borrow from financial institutions, limiting that person's ability to spend his or her future income today; also called a liquidity constraint

budget constraint

the limit that income places on expenditure

budget deficit

a shortfall of receipts from expenditure

budget surplus

an excess of receipts over expenditure

business cycle

economy-wide fluctuations in output, income, and employment

business fixed investment

equipment and structures that businesses buy fro use in future production

capital

1. the stock of equipment and structures used in production. 2. the funds to finance the accumulation of equipment and structures

capital budgeting

an accounting procedure that measures both assets and liabilities

central bank

the institution responsible for the conduct of monetary policy, such as the Fed in the U.S.

classical dichotomy

the theoretical separation of real and nominal variables in the classical model, which implies that nominal variables do not influence real variables

classical model

a model of the economy derived from the ideas of the classical, or pre-Keynesian, economists; a model based on the assumptions that wages and prices adjust to clear markets and that monetary policy does not influence real variables

closed economy

an economy that does not engage in international trade

commodity money

money that is intrinsically useful and would be valued even if it did not serve as money

competition

a situation in which there are many individuals or firms, so that the actions of any one of them do not influence market prices

constant returns to scale

a property of a production function whereby a proportionate increase in all factors of production leads to an increase in output of the same proportion

consumer price index (CPI)

a measure of the overall prices that shows the cost of a fixed basket of consumer goods relative to the cost of the same basket in a base year

consumption

goods and services purchased by consumers

consumption function

a relationship showing the determinants of consumption; for example, a relationship between consumption and disposable income, C= C(Y-T)

contractionary policy

policy that reduces aggregate demand, real income, and employment

coordination failure

a situation in which decision-makers reach an outcome that is inferior for all of them because of their inability to jointly choose strategies that would produce a preferred outcome

corporate income tax

the tax levied on the accounting profit of corporations

cost of capital

the amount forgone by holding a unit of capital for one period, including interest, depreciation, and the gain or loss from the change in the price of capital

cost-push inflation

inflation resulting from shocks to aggregate supply

countercyclical

moving in the opposite direction from output, incomes, and employment over the business cycle; rising during recessions and falling during recoveries

crowding out

the reduction in investment that results when expansionary fiscal policy raises interest rates

currency

the sum of outstanding paper money and coins

cyclical unemployment

the unemployment associated with short-run economic fluctuations; the deviation of unemployment from its natural rate

cyclically adjusted budget deficit

the budge deficit adjusted for the influence of the business cycle on government spending and tax revenue; the budget deficit that would occur if the economy's production and employment were at their natural levels. Also called full-employment budget deficit

debt-deflation

a theory according to which an unexpected fall in the price level redistributes real wealth from debtors to creditors and, therefore, reduces total spending in the economy

deflation

a decrease in the overall level of prices

demand deposits

assets that are held in banks and can be used on demand to make transactions, such as checking accounts

demand-pull inflation

inflation resulting from shocks to aggregate demand

demand shocks

exogenous events that shift the aggregate demand curve

depreciation

1. the reduction in the capital stock that occurs over time because of aging and use 2. a fall in the value of a currency relative to other currencies in the market for foreign exchange

depression

a very severe recession

devaluaiton

an action by the central bank to decrease the value of a currency under a system of fixed exchange rates

diminishing marginal product

a characteristic of a production function whereby the marginal product of a factor falls as the amount of the factor increases while all other factors are held constant

discount rate

the interest rate that the Fed charges when it makes loans to banks

discounting

the reduction in value of future expenditure and receipts, compared to current expenditure and receipts, resulting from the presence of a positive interest rate

discouraged workers

individuals who have left the labor force because they believe there is little hope of finding a job

disinflation

a reduction in the rate at which prices are rising

disposable income

income remaining after payment of taxes

dominated asset

an asset that offers an inferior return compared to another asset in all possible realizations of future uncertainty

double coincidence of wants

a situation in which two individuals have precisely the good that the other wants

economic profit

the amount of revenue remaining for the owners of a firm after all the factors of production have been compensated

efficiency of labor

a variable in the Solow growth model that measures the health, education, skills, and knowledge of the labor force

efficiency units of labor

a measure of the labor force that incorporates both the number of workers and the efficiency of each worker

efficiency-wage theories

theories of real-wage rigidity and unemployment according to which firms raise labor productivity and profits by keeping real wages above the equilibrium level

efficient markets hypothesis

the theory that asset prices reflect all publicly available information about the value of an asset

elasticity

the percentage change in a variable caused by a 1-percent change in another variable

endogenous growth theory

models of economic growth that try to explain the rate of technological change

endogenous variable

a variable that is explained by a particular model; a variable who's value is determined by the model's solution

equilibrium

a state of balance between opposing forces, such as the balance of supply and demand in a market

Euler's theorem

the mathematical result economists use to show that economic profit must be zero if the production function has constant returns to scale and if factors are paid their marginal products

ex ante real interest rate

the real interest rate anticipated when a loan is made; the nominal interest rate minus expected inflation rate

ex post real interest rate

the real interest rate actually realized; the nominal interest rate minus actual inflation

excess reserves

reserves held by banks above the amount mandated by reserve requirements

exchange rate

the rate at which a country makes exchanges in world markets

exogenous variable

a variable that a particular model takes as given; a variable who's value is independent of the model's solution

expansionary policy

policy that raises aggregate demand, real income, and employment

exports

goods and services sold to other countries

factor of production

an input used to produce goods and services; for example, capital or labor

factor price

the amount paid for one unit of a factor of production

factor share

the proportion of total income being paid to a factor of production

Federal Reserve

the central bank of the United States

fiat money

money that is not intrinsically useful and only has value because it is used as money

financial intermediation

the process by which resources are allocated from those individuals who wish to save some of their income for future consumption to those individuals and firms who wish to borrow to buy investment goods for future production

financing constraint

a limit on the quantity of funds a firm can raise -- such as through borrowing -- in order to buy capital

fiscal policy

the government's choice regarding levels of spending and taxation

Fisher effect

the one-for-one influence of expected inflation on the nominal interest rate

Fisher equation

the equation stating that the nominal interest rate is the sum of the real interest rate and expected inflation

fixed exchange rate

an exchange rate that is set by the central bank's willingness to buy and sell the domestic currency for foreign currencies at a predetermined price

flexible prices

prices that adjust quickly to equilibrate supply and demand

floating exchange rate

an exchange rate that the central bank allows to change in response to changing economic conditions and economic policies

flow

a variable measured as a quantity per unit of time

fractional-reserve banking

a system in which banks keep only some of their deposits on reserve

frictional unemployment

the unemployment that results because it takes time for workers to search for jobs that best suit their skills and tastes

GDP deflator

the ratio of nominal GDP to real GDP; a measure of the overall level of prices that shows the cost of the currently produced basket of goods relative to the cost of that basket in a base year

general equilibrium

the simultaneous equilibrium of all markets in the economy

gold standard

a monetary system in which gold serves as money or in which all money is convertible into gold at a fixed rate