Economics Unit 5

Annually balanced budget

A budget that is balanced each year, with revenues equaling expenditures.

Budget deficit

A situation where expenditures exceed revenues in a given period.

Budget surplus

A condition in which revenues exceed expenditures.

Classical model/view

An economic theory that emphasizes the self-regulating nature of markets.

Cost-push inflation

Inflation caused by rising costs of production, leading to a decrease in supply.

Crowding out effect

A situation where increased government spending leads to a reduction in private sector investment.

Cyclically balanced budget

A budget plan that balances over the course of a business cycle.

Debt deflation

A reduction in the general level of prices caused by a decrease in the supply of credit or money.

Demand-pull inflation

Inflation that occurs when demand for goods and services exceeds supply.

Discretionary monetary policy

Actions taken by a central bank to influence the economy based on current economic conditions.

Functional finance

The view that government should manage its finances to ensure economic stability.

Inflation tax

The reduction in purchasing power due to inflation that acts like a tax on money holdings.

Infrastructure

The basic physical systems and services essential for the economy to function.

Keynesian economics

An economic theory that advocates for active government intervention to manage economic cycles.

Laffer Curve

A theory suggesting that there is an optimal tax rate that maximizes revenue.

Liquidity trap

A situation where monetary policy becomes ineffective because interest rates are at or near zero.

Long-Run Phillips curve

A concept that reflects the relationship between inflation and unemployment in the long run.

Macroeconomic policy activism

The belief that active policy interventions can stabilize an economy.

Monetarism

An economic theory that emphasizes the role of governments in controlling the amount of money in circulation.

Monetary neutrality

The idea that changes in the money supply do not affect real economic variables in the long run.

Monetary policy rule

A guideline for how monetary authorities should conduct policy.

Natural rate hypothesis

The theory that unemployment will settle at a natural rate determined by economic factors.

Nonaccelerating inflation rate of unemployment (NAIRU)

The level of unemployment consistent with a stable rate of inflation.

Political business cycle

The theory that governments manipulate the economy for electoral gain.

Public Debt

The total amount of money that a government owes to creditors.

Quantity Theory of Monetary Policy

The theory that changes in the money supply have a direct relationship with the price level.

Rational expectations

The theory that people will make decisions based on their rational outlook, available information, and past experiences.

Real business cycle theory

An economic theory that emphasizes that business cycle fluctuations result from real (not monetary) shocks.

Short-Run Phillips curve

The inverse relationship between inflation and unemployment in the short run.

Supply side economics

An economic theory that posits that economic growth can be most effectively fostered by lowering taxes.

Velocity of money

The rate at which money is exchanged in an economy.

Zero bound

The situation when the nominal interest rate is at or near zero, limiting the central bank's ability to stimulate economic growth.

Aggregate production function

A representation of the relationship between total output and the inputs used in production.

Convergence hypothesis

The theory that poorer economies will tend to catch up with richer economies over time.

Depreciation

The reduction in the value of an asset over time, often due to wear and tear.

Diminishing returns to physical capital

A principle stating that as physical capital increases, the incremental gains in output will eventually decrease.

Economic growth

An increase in the production and consumption of goods and services, typically measured as GDP.

Growth accounting

A method of determining the source of economic growth, often attributed to capital, labor, and technology.

Human capital

The collective skills, knowledge, and experience of individuals that can facilitate economic growth.

Labor productivity

The amount of goods and services produced per hour of labor.

Physical capital

Tangible assets used in the production of goods and services.

Research and development (R&D)

The activities companies undertake to innovate and introduce new products or services.

Rule of 70

A formula used to estimate the number of years it will take for a quantity to double, given a fixed annual rate of growth.

Sustainable

Able to be maintained at a certain rate or level without depleting resources.

Technology

The application of scientific knowledge for practical purposes, especially in industry.

Total factor productivity

A measure of the efficiency with which all inputs are used in the production process.