Key Economic Terms and Definitions

45° Angle Line

Guideline used in Keynesian economics representing every point at which Real GDP is equal to total expenditures.

Absolute Economic Growth

An increase in Real GDP.

Aggregate Demand

The total quantity demanded of all final goods and services in the entire economy at a given time and price level.

Aggregate Market

The general interaction of all forces of supply and demand in an economy with the results of that interaction determining total economic output (Real GDP) and the Price Level in the economy.

Aggregate Supply

Total quantity supplied of all goods and services produced by all producers in an entire economy during a specific time period at a given price level.

Automatic Stabilizers

Government policies that avoid the information lag and the policy lag.

Balanced Budget

Tax revenue exactly equals government expenditure.

Bank

A financial intermediary which takes in funds from savers and uses them to make loans to borrowers.

Barter

Method of exchanging goods and services directly for other goods and services without using a medium of exchange.

Borrower

Party in a loan agreement which receives money from a lender and promises to repay the lender in a specified time.

Budget

The plans for current government expenditure as well as current government tax revenues.

Budget Deficit

Situation where tax revenues fail to cover government expenditure.

Budget Surplus

Situation where tax revenues exceed government expenditure.

Business Cycle

Fluctuation in the level of economic activity which forms a regular pattern and occurs around the long-run trend path of economic output in the economy.

Capital

A resource created from a combination of labor and land.

Capital Stock

The aggregate of all factories, roads, machinery, etc. and other capital goods in a country.

Capitalism

A political, social, and economic system in which all property is owned and controlled for the most part by private persons.

Central Bank

Institution charged primarily with controlling a country's money and banking system.

Ceteris Paribus

All other things held constant.

Classical Monetary Theory

Theory of monetary policy suggesting that increasing the money supply is unnecessary because it will only cause inflation.

Coincidence of Wants

When the set of goods or commodities each individual is willing to exchange is exactly what is desired or required by each party in a barter exchange.

Comparative Advantage

Ability of a country to produce a particular good at a lower cost than another country.

Comparative Disadvantage

When a country produces a particular good at a higher cost than another country.

Competitive Markets

A very large number of small buyers and sellers trading independently.

Consumer Price Index

Measure of the prices of a 'basket' of goods and services consumed by the average household regularly.

Consumer Satisfaction

The happiness people get from using goods and services.

Consumption

Aggregate household expenditures on goods and services in an economy to satisfy current wants.

Contraction

A decline in the level of economic activity in an economy.

Contractionary Fiscal Policy

Increase in taxation with the purpose of decreasing total expenditures in the economy.

Contractionary Monetary Policy

When the Fed sells government securities, raises interest rates, or increases the required reserve ratio for banks.

Crowding Out

Reductions in private consumption or investment that occurs because of an increase in government spending.

Currency

Coins and banknotes which comprise the physical aspects of a nation's money supply.

Cyclical Unemployment

Unemployment that can be eliminated by an increase in aggregate demand.

Demand

Term used to represent all the buyers in a market who want to buy what is being sold and have the money to purchase it.

Demand Curve

Downward sloping function on a market graph.

Demand Deposit

Money held by a bank which is transferrable by check or withdrawal in cash without notice.

Discount Rate

Interest rate a central bank charges depository and lending institutions that borrow reserves from it.

Disposable Income

Consumer personal income after all tax payments have been deducted.

Economic Growth

An increase in total output within an economy.

Economics

Concerned with understanding the social behavior of people and societies so that decisions can be made about what, how, and for whom goods and services are produced.

Employed

Includes all the people with part-time jobs.

Entrepreneurship

Interprets demand and makes decisions about how to respond to demand using production resources.

Equation of Exchange

M x V = P x Q

Equilibrium

The tendency of prices of goods and services to increase or decrease due to pressure from large groups of buyers and sellers.

Equilibrium Real GDP

In Keynesian economics, it is the point at which income (Real GDP) and aggregate expenditures (Total Expenditures) are equal on the Total Expenditures curve.

Excess Reserves

Any idle balances that are held by a bank that are greater than the required reserve.

Expansion

An increase in the level of economic activity in an economy.

Expansionary Fiscal Policy

Increase in government spending so that equilibrium Real GDP will increase and close a recessionary gap.

Expansionary Monetary Policy

When the Fed purchases government securities, lowers interest rates, or decreases the required reserve ratio for banks.

Exports

Goods and services produced in this country and consumed by people in another country.

Factors of Production

General term used in economics to describe all the resources of society that are used for production.

Federal Reserve System

Established to discharge the function of a central bank and provide a strengthened framework of regulatory control over commercial banking.

Fiat Money

Has value derived from legal enactment rather than being commodity-based.

Financial Intermediary

Institution or party engaged in bringing together those providing funds to be borrowed with those seeking to borrow funds to be used for investment.

Fiscal Policy

Use of taxation and government expenditure to regulate the aggregate level of economic activity.

Fractional Reserve Banking

Practice by which commercial banks maintain idle balances of deposited money equal to some ratio of total money deposits.

Frictional Unemployment

When workers have the right skills for job vacancies that exist, but it takes time to match the workers to the available jobs.

Full Employment

When the rate of unemployment is at the natural rate of unemployment.

Gold Standard

System of monetary organization under which the value of a country's money is legally defined as a fixed quantity of gold.

Government Securities

Marketable debt instruments of the U.S. Treasury.

Government Spending

Spending by local, state, and national governments on goods and services for consumption.

Gross Domestic Product (GDP)

A method of determining economic growth in terms of money value.

Human Capital

Education and training of labor resources to increase the quality and quantity of output in an economy.

Impact Lag

Time that passes between when policymakers enact changes in fiscal policy and when these changes have an actual effect on Real GDP.

Imports

Goods and services produced in another country and consumed by people in this country.

Inflation

A sustained rise in the general price level.

Inflation Rate

Change in the CPI during the time period divided by the CPI at the starting point of the time period.

Inflationary Gap

Actual economic output exceeds the long-run trend of economic activity, exerting upward pressure on prices in the economy.

Information Lag

Time that passes between when upturns and downturns in the business cycle occur and when government policymakers have the information on those upturns and downturns.

Interest

Money charged by banks to borrowers for borrowing other money.

International Trade

The decision by an economy to import rather than produce domestically.

Investment

Total dollar value spent by businesses on goods and services necessary for making other goods and services to be sold for consumption.

Keynesian Monetary Transmission Mechanism

Money supply increases, interest rates decrease, consumption/investment increases, Total Expenditures & AD increase, Real GDP increases.

Labor

Effort and time expended by people in the production of goods and services.

Labor Force

All the people who are either working or looking for work.

Labor Market

The market for supplying and hiring workers to perform certain jobs.

Laffer Curve

A graph showing that there is some optimal tax rate which maximizes government tax revenues such that tax rates above the optimal rate discourage production and hence result in lower total tax revenues.

Laissez Faire

A doctrine that government generally should not intervene in the marketplace.

Land

Fertile soil that is used for producing crops.

Liquidity Trap

Increases in the money supply have no effect on interest rates, stopping the keynesian transmission mechanism and stalling Real GDP.

Loan

An advance of finance/funds by a lender to a borrower.

Loanable Funds

Money available to be borrowed in financial markets.

Long Run Equilibrium

An economic condition in which an economy is experiencing neither an inflationary gap nor a recessionary gap.

M1

The supply of money in the U.S. that includes currency and checkable demand deposits.

M2

The supply of money in the U.S. that includes currency, demand deposits, most time deposits, and some money market accounts.

Macroeconomics

Examines the behaviors and decisions of whole economies.

Marginal Propensity to Consume (MPC)

The additional amount of money consumers will spend when they receive 'one more' dollar of income.

Market

Any context or 'place' in which the sale and purchase of goods and services takes place.

Market Economy

Generally associated with a Capitalist or free enterprise economy.

Measure of Value

Function of money is to create a common unit on which goods and services of differing qualities can be compared to one another.

Medium of Exchange

Any asset or instrument which serves an intermediary function in the exchange process.

Mixed Economy

A blend of private and public control that characterizes most of the industrialized world.

Monetarism

Suggests that variation in the money supply has major influences on national output in the short run but that the price level is affected in the long run.

Monetarist Transmission Mechanism

Money supply increases, Total Expenditures & AD increase, Real GDP increases.

Monetary Base

Sum of all currency that is circulated in the hands of the public plus commercial bank deposits on reserve with the Fed plus cash in the vaults of commercial banks.

Monetary Policy

Branch of economic policy which attempts to achieve economic goals (economic growth, full employment, price level stability) through manipulation of the money supply.

Money

Anything which is widely acceptable in exchange for goods.

Money Creation

Chain reaction of lending and depositing of money that result in an increase in an economy's money supply.

Money Destruction

Decrease in the money supply of an economy due to checkable deposits deteriorated by withdrawals of funds from banks.

Money Multiplier

The ratio of the change in the money supply to an initial change in the monetary base.