macro unit 5 vocab test

loanable funds market

loanable funds market

a hypothetical market that brings together those who want to lend money and those who want to borrow money.

rate of return

(on a project) is the profit earned on the project expressed as a percentage of its cost.

crowding out

occurs when a government deficit drives up the interest rate and leads to reduced investment spending.

investment tax credit

an amount that firms are allowed by law to deduct from their taxes based on their investment spending.

cyclically adjusted budget balence

an estimate of what the budget balance would be if real GDP were exactly equal to potential output.

gov’t debt

the accumulation of past budget deficits, minus past budget surpluses.

debt-GDP ratio

the government's debt as a percentage of GDP.

target federal funds rate

the Federal Reserve's desired level for the federal funds rate; the Federal Reserve can achieve this target through open market operations.

expansionary monetary policy

monetary policy that increases aggregate demand.

contractionary monetary policy

monetary policy that reduces aggregate demand.

taylor rule for monetary policy

rule for setting the federal funds rate that takes into account both the inflation rate and the output gap.

inflation targeting

when the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target.

monetary neutrality

the concept that changes in the money supply have no real effects on the economy.

monetarism

asserts that GDP will grow steadily if the money supply grows steadily.

quantity theory of money

emphasizes the positive relationship between the price level and the money supply; relies on the velocity equation (M V = P Y).

velocity of money

the ratio of nominal GDP to the money supply; a measure of the number of times the average dollar bill is spent per year.

rule of 70

a mathematical formula that tells us that the time it takes a variable that grows gradually over time to double is approximately 70 divided by that variable's annual growth rate.

labor productivity

output per worker; also known simply as productivity.

physical capital

often referred to simply as capital—consists of manufactured (human-made) productive resources, such as equipment, buildings, tools, and machines, used to produce other goods and services.

human capital

the improvement in labor created by the education and knowledge that is embodied in the workforce.

technology

the technical means for producing goods and services.