Unit 5 Vocab

Cyclically adjusted budget balance

a budget philosophy calling for budget deficits during recessions to be financed by budget surpluses during expansions

Fiscal year

the 12-month period a government or business uses for accounting and budgeting

Public debt

federal government debt held by individuals and institutions outside the government

Debt-GDP

Government debt as percentage to the GDP. Used as a measure of the government's ability to pay its debt.

Implicit Liabilities

money that the government has promised to pay in the future

Target Federal Funds rate

the interest rate at which banks lend reserve balances to other depository institutions overnight

Expansionary Monetary Policy

tool to increase money supply during a recession to decrease interest

Contractionary Monetary policy

tool to decrease money supply during inflation to increase interest

Taylor rule for monetary policy

sets a target nominal interest rate based on inflation and economic activity

inflation target

sets a target nominal interest rate based on inflation and economic activity

monetary neutrality

any increase in the money supply will eventually lead to a proportional increase in price levels

classical model of the price level

inflation tax

reduces the purchasing power of money, acting as a transfer of wealth from citizens to the government as the government prints more money

cost-push inflation

when rising production costs force businesses to raise prices

demand-pull inflation

when aggregate demand for goods and services outpaces aggregate supply

short-run Phillips curve

Shows the inverse relationship between inflation

and unemployment

nonaccelerating inflation rate of unemployment (NAIRU)

the rate of unemployment at which inflation stabilizes

Long-run Philips Curve

a vertical line representing the belief that there is no permanent trade-off between inflation and unemployment.

Debt Inflation

elevated federal debt increases the risk of inflationary pressure

zero bound

a constraint occurring when central banks reduce short-term nominal interest rates to zero or near-zero

liquidty trap

despite extremely low-interest rates, monetary policy fails to stimulate economic growth because households and businesses hoard cash rather than spending or investing

macroeconomic policy activism

the deliberate use of monetary and fiscal policies by governments and central banks to stabilize the economy, aiming to reduce the severity of business cycles, such as recessions and booms

monetarism

an economic theory developed by Milton Friedman that emphasizes the money supply as the primary determinant of nominal GDP and inflation

discretionary budget

part of the U.S. federal budget that is not mandatory for spending

monetary policy rule

the Federal Reserve managing the money supply and interest rates to achieve maximum employment and price stability

quantity theory of money

general price level of goods and services is directly proportional to the amount of money in circulation

velocity of money

the rate at which one unit of currency is used to purchase domestically produced goods and services within a given period

natural rate hypothesis

when an economy is in a steady state of full employment, is the proportion of the workforce who are unemployed

political business cycle

occurs when policymakers, such as the president or congress, manipulate economic policies to influence voter behavior

new classical macroeconomics

a school of economic thought originating in the 1970s that emphasizes rational expectations, microfoundations (individual maximizing behavior), and continuous market clearing

rational expectations

an economic theory stating that people make decisions based on all available information, past experience, and future expectations, rather than just past trends

new Keynesian experience

a modern school of macroeconomics that provides microeconomic foundations

real business cycle theory

posits that economic fluctuations (booms and busts) are caused by real, non-monetary shocks

rule of 70

labor productivity

how much economic output is generated per unit of labor

Physical capital

tangible assets

human capital

workers

technology

advancements that increase production

aggregate production function

as capital input increase, capital output increases

diminishing returns to physical capital

occurs when adding more machinery or infrastructure (capital) per worker produces progressively smaller increases in output, assuming technology and human capital remain constant

growth accounts

technique used to measure the contribution of different factors

total factor productivity

measures the efficiency and intensity with which inputs, such as labor and capital, are utilized in production

convergence hypothesis

an economic theory stating that poorer economies' per capita incomes tend to grow faster than richer ones, allowing them to close the income gap over time

research and development (R&D)

investment to create new knowledge, products, or technologies for later benefits

Infrastructure

investments for buisnesses to produce more products

Sustainable

meeting needs without compromising materials for the future

Depreciation

the loss of value over time