Economics: Chapter 20

GDP deflator

 The price index of all final domestically produced goods and services: i.e. all those items that contribute towards GDP

International substitution effect

As prices rise, people at home and abroad buy less of this country’s products and more products from abroad

Inter-temporal substitution effect

Higher prices may lead to higher interest rates and thus less borrowing and more saving. Current consumption falls; future consumption (from the higher savings) rises

Real balance effect

As the price level rises, so the value of people’s money balances will fall. They will therefore spend less in order increase their money balances and go some way to protecting their real value

Aggregate demand for labor curve

 A curve showing the total demand for labor in the economy at different average real wage rates

Aggregate supply of labor curve

A curve showing the total number of people willing and able to work at different average real wage rates

Disequilibrium unemployment

Unemployment resulting from real wage rates in the economy being above the equilibrium level

Equilibrium (natural) uneployment

The unemployment that exists even when the labor market is in equilibrium. It is the difference between those who would like employment at the current wage and those who are willing and able to take a job.

Money illusion

The belief that a money change in wages or prices represents a real change

Money illusion

The belief that a money change in wages or prices represents a real change

Natural level of real income (or output)

The level of output consistent with the equilibrium or “natural” level of employment