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					economics       The study of how individuals and societies
                choose to use the scarce resources that nature and
                previous generations have provided
economic        Given scarce resources, how exactly do large,
problem         complex societies go about answering the three
                basic economic questions?
economic        A statement or set of related statements about
theory          cause and effect, action and reaction

microeconomi The branch of economics that examines the
cs            functioning of individual industries and the
              behavior of individual decision-making units-that
              is, business firms and households
macro-        The branch of economics that examines the
economics     economic behavior of aggregates-income,
              employment, output, and so on-on a national
Great         The period of severe economic contraction and
Depression    high unemployment that began in 1929 and
              continued throughout the 1930s
fine-tuning   The phrase used by Walter Heller to refer to the
              government's role in regulating inflation and
stagflation   Occurs when the overall price level rises rapidly
              (inflation) during periods of recession or high
              and persistent unemployment (stagnation).
laissez-faire Literally from the French: "allow [them] to do."
economy       An economy in which individual people and
              firms pursue their own self-interests without any
              central direction or regulation
command       An economy in which a central government
economy       either directly or indirectly sets output targets,
              incomes, and prices
consumer      The idea that consumers ultimately dictate what
sovereignty   will be produced (or not produced) by choosing
              what to purchase (and what not to purchase)
price         The amount that a product sells for per unit. It
              reflects what society is willing to pay
theory of     Ricardo's theory that specialization and free trade
comparative   will benefit all trading partners (real wages will
advantage     rise), even those that may be absolutely more (or
              less) efficient producers
model         A formal statement of a theory, usually a
              mathematical statement of a presumed
              relationship between two or more variables
variable      A measure that can change from time to time or
              from observation to observation
Ockham's      The principle that irrelevant detail should be cut
razor         away
positive      An approach to economics that seeks to
economics     understand behavior and the operation of systems
              without making judgments. It describes what
              exists and how it works.
normative     An approach to economics that analyzes
economics     outcomes of economic behavior, evaluates them
              as good or bad, and may prescribe course of
              action. Also called policy economics.
descriptive   The compilation of data that describe phenomena

economics         and facts
empirical         The collection and use of data to test economic
economics         theories
equity            Fairness
efficiency        The condition in which the economy is
                  producing what people want at least possible cost
stability         A condition in which output is steady or
                  growing, with low inflation and full employment
                  of resources
economic          An increase in the total output of an economy. It
growth            occurs when a society acquires new resources or
                  when it learns to produce more using existing
opportunity       The best alternative that we forgo, or give up,
cost              when we make a choice or a decision
sunk costs        Costs that cannot be avoided, regardless of what
                  is done in the future, because they have already
                  been incurred
ceteris           A device used to analyze the relationship
paribus, or all   between two variables while the values of other
else equal        variables are held unchanged
efficient         A market in which profit opportunities are
market            eliminated almost instantaneously.
Industrial        The period in England during the late eighteenth
Revolution        and early nineteenth centuries in which new
                  manufacturing technologies and improved
                  transportation gave rise to the modern factory
                  system and a massive movement of the
                  population from the countryside to the cities
capital           Those goods produced by the economic system
                  that are used as inputs to produce other goods
                  and services
outputs           Usable products
resources or      Anything provided by nature or previous
inputs            generations that can be used directly or indirectly
                  to satisfy human wants
input or factor   The markets in which the resources used to
markets           produce products are exchanged
labor market      The input factor market in which households
                  supply work for wages to firms that demand
capital market    The market in which households supply their
                  savings to firms that demand funds to buy capital
land market       The input/factor market in which households
                  supply land or other real property in exchange
                  for rent
three basic       The three basic questions that all societies must
questions         answer: What will be produced? How will it be
                  produced? Who will get what is produced?
producers         Those people or groups of people, whether
                  private or public, who transform resources into
                  usable products
production        The process by which resources are transformed
                  into useful forms
factors of        The inputs into the production process. Land,
production        Labor, and capital are the three key factors of

product or     The markets in which goods and services are
output markets exchanged
quantity       The amount (number of units) of a product that a
demanded       household would buy in a given period if it could
               buy all it wanted at the current market price
demand curve A graph illustrating how much of a given product
               a household would be willing to buy at different
law of demand The negative relationship between price and
               quantity demanded: As price rises, quantity
               demanded decreases. As price falls, quantity
               demanded increases
shift of a     The change that takes place in a demand curve
demand curve corresponding to a new relationship between
               quantity demanded of a good and price of that
               good. The shift is brought about by a change in
               the original conditions
movement       The change in quantity demanded brought about
along a        by a change in price.
demand curve
market         The sum of all the quantities of a good or service
demand         demanded per period by all the households
               buying in the market for that good or service.
aggregate      The total demand for goods and services in an
demand         economy
consumer       Goods produced for present consumption
normal goods Goods for which demand goes up when income
               is higher and for which demand goes down when
               income is lower
inferior goods Goods for which demand tends to fall when
               income rises
substitutes    Goods that can serve as replacements for one
               another; when the price of one increase, demand
               for the other goes up
perfect        Identical products
complements, Goods that "go together"; a decrease in the price
complementar of one results in an increase in demand for the
y goods        other, and vice versa
investment     The process of using resources to produce new
               capital. New capital additions to a firms capital
               stock. Although capital is measured at a given
               point in time (a stock), investment is measured
               over a period of time (a flow). The flow of
               investment increases the capital stock
production     A graph that shows all the combinations of goods
possibility    and services that can be produced if all of
frontier (ppf) society's resources are used efficiently

marginal rate The slope of the production possibility frontier
of             (ppf).
firm           An organization that comes into being when a
               person or a group of people decides to produce a
               good or service to meet a perceived demand.
               Most firms exist to make a profit

entrepreneur      A person who organizes, manages, and assumes
                  the risk of a firm, taking a new idea or a new
                  product and turning it into successful business
households        The consuming units in an economy
income            The sum of all a household's wages, salaries,
                  profits, interest payments, rents, and other forms
                  of earnings in a given period of time. It is a flow
wealth or net     The total value of what a household owns minus
worth             what it owes. It is a stock measure
wealth or net     The total value of what a household owns minus
worth             what it owes. It is a stock measure
profit            The excess of revenues over cost in a given
quantity          The amount of a particular product that a firm
supplied          would be willing and able to offer for sale at a
                  particular price during a given time period
supply            A table showing how much of a product firms
schedule          will supply at different prices
law of supply     The positive relationship between price and
                  quantity of a good supplied: An increase in
                  market price will lead to an increase in quantity
                  supplied, and a decrease in market price will lead
                  to a decrease in quantity supplied
supply curve      A graph illustrating how much of a product a
                  firm will supply a different price
market supply     The sum of all that is supplied each period by all
                  producers of a single product
aggregate         The total supply of goods and services in an
supply            economy
equilibrium       The condition that exists when quantity supplied
                  and quantity demanded are equal. At
                  equilibrium, there is no tendency for price to
excess demand     The condition that exists when quantity
or shortage       demanded exceeds quantity supplied at the
                  current price
excess demand     The condition that exists when quantity
or shortage       demanded exceeds quantity supplied at the
                  current price
excess supply     The condition that exists when quantity supplied
or surplus        exceeds quantity demanded at the current price
price rationing   The process by which the market system
                  allocates goods and services to consumers when
                  quantity demanded exceeds quantity supplied
price ceiling     A maximum price that sellers may charge for a
                  good, usually set by government
queuing           Waiting in line as a means of distributing goods
                  and services; a nonprice rationing mechanism
favored           Those who receive special treatment from
customers         dealers during situations of excess demand
ration coupons    Tickets or coupons that entitle individuals to
                  purchase a certain amount of a given product per
black market      A market in which illegal trading takes place at
                  market-determined prices
inflation         An increase in the overall price level
hyperinflation    A period of very rapid increases in the overall

                price level
business cycle  The cycle of short-term ups and downs in the
aggregate       The total quantity of goods and services
output          produced (or supplied) in an economy in a given
recession       Period during which aggregate output declines.
                Conventionally, a period in which aggregate
                output declines for two consecutive quarters
depression      A prolonged and deep recession
expansion or    The period in the business cycle from a trough
boom            up to a peak, during which output and
                employment rise
contraction,    The period in the business cycle from a peak
recession, or   down to a trough, during which output and
slump           employment fall
unemployment The percentage of the labor force that is
rate            unemployed
fiscal policy   Government policies concerning taxes and
monetary        The tools used by the Federal Reserve to control
policy          the money supply
supply-side     Government policies that focus on stimulating
policies        aggregate supply instead of aggregate demand.
circular flow   A diagram showing the income received and
                payments made by each sector of the economy
transfer        Cash payments made by the government to
payments        people who do not supply goods, services, or
                labor in exchange for these payments. They
                include social security benefits, veterans'
                benefits, and welfare payments
Treasury        Promissory notes issued by the federal
bonds, notes, government when it borrows money
and bills
corporate       Promissory notes issued by corporations when
bonds           they borrow money
shares of stock Financial instruments that give to the holder a
                share in the firm's ownership and therefore the
                right to share in the firm's profits
dividends       The portion of a corporation's profits that the
                firm pays out each period to its shareholders
national        Data collected and published by the government
income and      describing the various components of national
product         income and output in the economy
gross domestic The total market value of all final goods and
product (GDP) services produced within a given period by
                factors of production located within a country
final goods     Goods and services produced for final use
and services
intermediate    Goods that are produced by one firm for use in
goods           further processing by another firm
value added     The difference between the value of goods as
                they leave a stage of production and the cost of
                the goods as they entered that stage
gross national The total market value of all final goods and
product (GNP) services produced within a given period by
                factors of production owned by a country's

                citizens, regardless of where the output is
expenditure     A method of computing GDP that measures the
approach        amount spent on all final goods during a given
income          A method of computing GDP that measures the
approach        income—wages, rents, interest, and profits—
                received by all factors of production in producing
                final goods
personal        A major component of GDP: expenditures by
consumption     consumers on goods and services
durable goods  Goods that last a relatively long time, such as
               cars and household appliances
nondurable     Goods that are used up fairly quickly, such as
goods          food and clothing
services       The things we buy that do not involve the
               production of physical things, such as legal and
               medical services and education
gross private  Total investment in capital—that is, the purchase
domestic       of new housing, plants, equipment, and inventory
investment (I) by the private (or nongovernment) sector
nonresidential Expenditures by firms for machines, tools,
investment     plants, and so on
residential    Expenditures by households and firms on new
investment     houses and apartment buildings
change in      The amount by which firms' inventories change
business       during a period. Inventories are the goods that
inventories    firms produce now but intend to sell later
depreciation   The amount by which an asset's value falls in a
               given period
gross          The total value of all newly produced capital
investment     goods (plant, equipment, housing, and inventory)
               produced in a given period
net investment Gross investment minus depreciation
government     Expenditures by federal, state, and local
consumption    governments for final goods and services
and gross
investment (G)
net exports    The difference between exports (sales to
(EX - IM)      foreigners of U.S.-produced goods and services)
               and imports (U.S. purchases of goods and
               services from abroad). The figure can be positive
               or negative
national       The total income earned by the factors of
income         production owned by a country's citizens
compensation Includes wages, salaries, and various
of employees supplements—employer contributions to social
               insurance and pension funds, for example—paid
               to households by firms and by the government
proprietors'   The income of unincorporated businesses
corporate      The income of corporate businesses
rental income The income received by property owners in the
               form of rent
indirect taxes Taxes like sales taxes, customs duties, and

                license fees
subsidies       Payments made by the government for which it
                receives no goods or services in return
net factor      Payments of factor income to the rest of the
payments to     world minus the receipt of factor income from
the rest of the the rest of the world
net national    Gross national product minus depreciation; a
product (NNP) nation's total product minus what is required to
                maintain the value of its capital stock
personal        The total income of households. Equals (national
income          income) minus (corporate profits minus
                dividends) minus (social insurance payments)
                plus (interest income received from the
                government and households) plus (transfer
                payments to households). The income received
                by households after paying social insurance taxes
                but before paying personal income taxes
disposable      Personal income minus personal income taxes.
personal        The amount that households have to spend or
income or       save
personal        The amount of disposable income that is left
saving          after total personal spending in a given period
personal        The percentage of disposable personal income
saving rate     that is saved. If the personal saving rate is low,
                households are spending a large amount relative
                to their incomes; if it is high, households are
                spending cautiously
current dollars The current prices that one pays for goods and
nominal GDP Gross domestic product measured in current
weight          The importance attached to an item within a
                group of items
base-year       The year chosen for the weights in a fixed-
                weight procedure
fixed-weight    A procedure that uses weights from a given base
procedure       year
underground     The part of the economy in which transactions
economy         take place and in which income is generated that
                is unreported and therefore not counted in GDP
per capita      A country's GDP or GNP divided by its
GDP or GNP population
employed        Any person 16 years old or older (1) who works
                for pay, either for someone else or in his or her
                own business for 1 or more hours per week, (2)
                who works without pay for 15 or more hours per
                week in a family enterprise, or (3) who has a job
                but has been temporarily absent, with or without
unemployed      A person 16 years old or older who is not
                working, is available for work, and has made
                specific efforts to find work during the previous
                4 weeks
not in the      A person who is not looking for work, either
labor force     because he or she does not want a job or has

                given up looking
labor force     The number of people employed plus the number
                of unemployed
unemployment The percentage of the labor force that is
rate            unemployed
labor-force     The ratio of the labor force to the total population
participation   16 years old or older
discouraged-    The decline in the measured unemployment rate
worker effect that results when people who want to work but
                cannot find jobs grow discouraged and stop
                looking, thus dropping out of the ranks of the
                unemployed and the labor force
frictional      The portion of unemployment that is due to the
unemployment normal working of the labor market; used to
                denote short-run job/skill matching problems
structural      The portion of unemployment that is due to
unemployment changes in the structure of the economy that
                result in a significant loss of jobs in certain
natural rate of The unemployment that occurs as a normal part
unemployment of the functioning of the economy. Sometimes
                taken as the sum of frictional unemployment and
                structural unemployment
cyclical        The increase in unemployment that occurs during
unemployment recessions and depressions
labor supply    A graph that illustrates the amount of labor that
curve           households want to supply at the particular wage
labor demand A graph that illustrates the amount of labor that
curve           firms want to employ at the particular wage rate
sticky wages    The downward rigidity of wages as an
                explanation for the existence of unemployment
social, or      Unspoken agreements between workers and
implicit,       firms that firms will not cut wages
relative-wage An explanation for sticky wages (and therefore
explanation of unemployment): If workers are concerned about
unemployment their wages relative to other workers in other
                firms and industries, they may be unwilling to
                accept a wage cut unless they know that all other
                workers are receiving similar cuts
explicit        Employment contracts that stipulate workers’
contracts       wages, usually for a period of 1 to 3 years
cost-of-living Contract provisions that tie wages to changes in
adjustments     the cost of living. The greater the inflation rate,
(COLAs)         efficiency wage theory An explanation for
                unemployment that holds that the productivity of
                workers increases with the wage rate. If this is
                so, firms may have an incentive to pay wages
                above the market-clearing rate
efficiency      An explanation for unemployment that holds that
wage theory     the productivity of workers increases with the
                wage rate. If this is so, firms may have an
                incentive to pay wages above the market-clearing
minimum         Laws that set a floor for wage rates—that is, a
wage laws       minimum hourly rate for any kind of labor

inflation      An increase in the overall price level
deflation      A decrease in the overall price level
sustained      An increase in the overall price level that
inflation      continues over a significant period
NAIRU          The nonaccelerating inflation rate of
inflation rate The percentage change in the price level
consumer       A price index computed each month by the
price index    Bureau of Labor Statistics using a bundle that is
(CPI)          meant to represent the "market basket" purchased
               monthly by the typical urban consumer
producer price Measures of prices that producers receive for
indexes (PPIs) products at all stages in the production process
real interest  The difference between the interest rate on a loan
rate           and the inflation rate
Phillips Curve A graph showing the relationship between the
               inflation rate and the unemployment rate

velocity of      The number of times a dollar bill changes hands,
money            on average, during a year; the ratio of nominal
                 GDP to the stock of money
quantity         The theory based on the identity M × The theory
theory of        based on the identity M × V = P × Y and the
money            assumption that the velocity of money (V) is
                 constant (or virtually constant).
rational-        The hypothesis that people know the "true
expectations     model" of the economy and that they use this
hypothesis       model to form their expectations of the future
Lucas supply     The supply function embodies the idea that
function         output (Y) depends on the difference between the
                 actual price level and the expected price level
price surprise   Actual price level minus expected price level
real business    An attempt to explain business cycle fluctuations
cycle theory     under the assumptions of complete price and
                 wage flexibility and rational expectations. It
                 emphasizes shocks to technology and other
Laffer curve     With the tax rate measured on the vertical axis
                 and tax revenue measured on the horizontal axis,
                 the Laffer curve shows there is some tax rate
                 beyond which the supply response is large
                 enough to lead to a decrease in tax revenue for
                 further increases in the tax rate
trade surplus    The situation when a country exports more than
                 it imports
trade deficit    The situation when a country imports more than
                 it exports
Corn Laws        The tariffs, subsidies, and restrictions enacted by
                 the British Parliament in the early nineteenth
                 century to discourage imports and encourage
                 exports of grain
absolute         The advantage in the production of a product
advantage        enjoyed by one country over another when it
                 uses fewer resources to produce that product than
                 the other country does
comparative      The advantage in the production of a product
advantage      enjoyed by one country over another when that
               product can be produced at lower cost in terms of
               other goods than it could be in the other country
terms of trade The ratio at which a country can trade domestic
               products for imported products
exchange rate The ratio at which two currencies are traded. The
               price of one currency in terms of another
factor         The quantity and quality of labor, land, and
endowments     natural resources of a country
Heckscher-     A theory that explains the existence of a
Ohlin theorem country's comparative advantage by its factor
               endowments: A country has a comparative
               advantage in the production of a product if that
               country is relatively well endowed with inputs
               used intensively in the production of that product
protection     The practice of shielding a sector of the economy
               from foreign competition
tariff         A tax on imports
export         Government payments made to domestic firms to
subsidies      encourage exports
dumping        A firm or industry sells products on the world
               market at prices below the cost of production
quota          A limit on the quantity of imports
Smoot-         The U.S. tariff law of the 1930s, which set the
Hawley tariff highest tariffs in U.S. history (60 percent). It set
               off an international trade war and caused the
               decline in trade that is often considered a cause
               of the worldwide depression of the 1930s
General        An international agreement signed by the United
Agreement on States and 22 other countries in 1947 to promote
Tariffs and    the liberalization of foreign trade
Trade (GATT)
economic       Occurs when two or more nations join to form a
integration    free-trade zone
European       The European trading bloc composed of Austria,
Union (EU)     Belgium, Denmark, Finland, France, Germany,
               Greece, Ireland, Italy, Luxembourg, the
               Netherlands, Portugal, Spain, Sweden, and the
               United Kingdom
U.S.-Canadian An agreement in which the United States and
Free-Trade     Canada agreed to eliminate all barriers to trade
Agreement      between the two countries by 1998
North          An agreement signed by the United States,
American       Mexico, and Canada in which the three countries
Free-Trade     agreed to establish all North America as a free-
Agreement      trade zone
foreign        All currencies other than the domestic currency
exchange       of a given country
balance of     The record of a country's transactions in goods,
payments       services, and assets with the rest of the world;
               also the record of a country's sources (supply)
               and uses (demand) of foreign exchange
balance of     A country's exports of goods and services minus
trade          its imports of goods and services
trade deficit  Occurs when a country's exports of goods and
               services are less than its imports of goods and
               services in a given period

balance on        Net exports of goods, plus net exports of
current           services, plus net investment income, plus net
account           transfer payments
balance on        In the United States, the sum of the following
capital account   (measured in a given period): the change in
                  private U.S. assets abroad, the change in foreign
                  private assets in the United States, the change in
                  U.S. government assets abroad, and the change
                  in foreign government assets in the United States
marginal          The change in imports caused by a $1 change in
propensity to     income
import (MPM)
trade feedback The tendency for an increase in the economic
effect          activity of one country to lead to a worldwide
                increase in economic activity, which then feeds
                back to that country
price feedback The process by which a domestic price increase
effect          in one country can "feed back" on itself through
                export and import prices. An increase in the price
                level in one country can drive up prices in other
                countries. This in turn further increases the price
                level in the first country
floating, or    Exchange rates that are determined by the
market-         unregulated forces of supply and demand
exchange rates
appreciation of The rise in value of one currency relative to
a currency      another
depreciation of The fall in value of one currency relative to
a currency      another
law of one      If the costs of transportation are small, the price
price           of the same good in different countries should be
                roughly the same
purchasing-     A theory of international exchange holding that
power-parity    exchange rates are set so that the price of similar
theory          goods in different countries is the same
J-curve effect Following a currency depreciation, a country's
                balance of trade may get worse before it gets
                better. The graph showing this effect is shaped
                like the letter J, hence the name "J-curve effect."
vicious-circle- Suggests that poverty is self-perpetuating
of-poverty      because poor nations are unable to save and
hypothesis      invest enough to accumulate the capital stock
                that would help them grow
capital flight  The tendency for both human capital and
                financial capital to leave developing countries in
                search of higher rates of return elsewhere
brain drain     The tendency for talented people from
                developing countries to become educated in a
                developed country and remain there after
social          Basic infrastructure projects such as roads, power
overhead        generation, and irrigation systems
import          An industrial trade strategy that favors
substitution    developing local industries that can manufacture
                goods to replace imports
export          A trade policy designed to encourage exports
International     An international agency whose primary goals are
Monetary          to stabilize international exchange rates and to
Fund              lend money to countries that have problems
                  financing their international transactions
World Bank        An international agency that lends money to
                  individual countries for projects that promote
                  economic development
structural        A series of programs in developing nations
adjustment        designed to (1) reduce the size of their public
                  sectors through privatization and/or expenditure
                  reductions, (2) decrease their budget deficits, (3)
                  control inflation, and (4) encourage private
                  saving and investment through tax reform
fertility rate    The birth rate. Equal to (the number of births per
                  year divided by the population) × 100
mortality rate    The death rate. Equal to (the number of deaths
                  per year divided by the population) × 100
natural rate of   The difference between the birth rate and the
population        death rate. It does not take migration into account
debt              An agreement between banks and borrowers
rescheduling      through which a new schedule of repayments of
                  the debt is negotiated; often some of the debt is
                  written off and the repayment period is extended
stabilization     An agreement between a borrower country and
program           the International Monetary Fund in which the
                  country agrees to revamp its economic policies to
                  provide incentives for higher export earnings and
                  lower imports
socialist         An economy in which most capital is owned by
economy           the government instead of private citizens. Also
                  called social ownership
capitalist        An economy in which most capital is privately
economy           owned
communism         An economic system in which the people control
                  the means of production (capital and land)
                  directly, without the intervention of a
                  government or state
market–           An economy that combines government
socialist         ownership with market allocation
tragedy of        The idea that collective ownership may not
commons           provide the proper private incentives for
                  efficiency because individuals do not bear the
                  full costs of their own decisions but do enjoy the
                  full benefits
shock therapy     The approach to transition from socialism to
                  market capitalism that advocates rapid
                  deregulation of prices, liberalization of trade, and
economic          An increase in the total output of an economy.
growth            Defined by some economists as an increase of
                  real GDP per capita
modern            The period of rapid and sustained increase in real
economic          output per capita that began in the Western
growth            World with the Industrial Revolution
aggregate         The mathematical representation of the
production        relationship between inputs and national output,
function          or gross domestic product
labor             Output per worker hour; the amount of output
productivity      produced by an average worker in 1 hour
productivity of   The amount of output produced per unit of an
an input          input
invention         An advance in knowledge
innovation        The use of new knowledge to produce a new
                  product or to produce an existing product more
consumer          The notion that people are free to choose, and
sovereignty       that things that people do not want will not sell.
                  "The customer rules."
fiscal policy     The government's spending and taxing policies
monetary          The behavior of the Federal Reserve concerning
policy            the nation's money supply
discretionary     Changes in taxes or spending that are the result
fiscal policy     of deliberate changes in government policy
net taxes (T)     Taxes paid by firms and households to the
                  government minus transfer payments made to
                  households by the government
disposable, or    Total income minus net taxes: Y - T
income (Yd)
budget deficit    The difference between what a government
                  spends and what it collects in taxes in a given
                  period: G - T
government        The ratio of the change in the equilibrium level
spending          of output to a change in government spending
tax multiplier   The ratio of change in the equilibrium level of
                 output to a change in taxes
federal surplus Federal government receipts minus expenditures
(+) or deficit
federal debt     The total amount owed by the federal
automatic        Revenue and expenditure items in the federal
stabilizers      budget that automatically change with the state
                 of the economy in such a way as to stabilize
fiscal drag      The negative effect on the economy that occurs
                 when average tax rates increase because
                 taxpayers have moved into higher income
                 brackets during an expansion
full-            What the federal budget would be if the economy
employment       were producing at a full-employment level of
budget           output
structural       The deficit that remains at full employment
cyclical deficit The deficit that occurs because of a downturn in
                 the business cycle
transaction      The main reason that people hold money—to
motive           buy things
nonsynchroniz The mismatch between the timing of money
ation of         inflow to the household and the timing of money
income and       outflow for household expenses
speculation      One reason for holding bonds instead of money:
motive           Because the market value of interest-bearing

                bonds is inversely related to the interest rate,
                investors may wish to hold bonds when interest
                rates are high with the hope of selling them when
                interest rates fall
tight monetary Fed policies that contract the money supply in an
policy          effort to restrain the economy
easy monetary Fed policies that expand the money supply in an
policy          effort to stimulate the economy
average         The proportion of income households spend on
propensity to   consumption. Determined by dividing
consume         consumption (C) by income (Y).
life-cycle      A theory of household consumption: Households
theory of       make lifetime consumption decisions based on
consumption     their expectations of lifetime income
permanent       The average level of one's expected future
income          income stream
nominal wage The wage rate in current dollars
real wage rate The amount that the nominal wage rate can buy
                in terms of goods and services
nonlabor, or    Any income received from sources other than
nonwage,        working—inheritances, interest, dividends,
income          transfer payments, and so on
unconstrained The amount a household would like to work
supply of       within a given period at the current wage rate if it
labor           could find the work
constrained     The amount a household actually works in a
supply of       given period at the current wage rate
inputs          The goods and services that firms purchase and
                turn into output
plant-and-      Purchases by firms of additional machines,
equipment       factories, or buildings within a given period
inventory       Occurs when a firm produces more output than it
investment      sells within a given period
labor-intensive A production technique that uses a large amount
technology      of labor relative to capital
capital-        A production technique that uses a large amount
intensive       of capital relative to labor
animal spirits A phrase coined by Keynes to describe investors'
of              feelings
accelerator     The tendency for investment to increase when
effect          aggregate output increases and decrease when
                aggregate output decreases, accelerating the
                growth or decline of output
excess labor,   Labor and capital that are not needed to produce
excess capital the firm's current level of output
adjustment      The costs that a firm incurs when it changes its
costs           production level—for example, the
                administration costs of laying off employees or
                the training costs of hiring new workers
desired, or     The level of inventory at which the extra cost (in
optimal, level lost sales) from lowering inventories by a small
of inventories amount is just equal to the extra gain (in interest

                revenue and decreased storage costs).
productivity,   Output per worker hour; the amount of output
or labor        produced by an average worker in 1 hour
Okun's Law      The theory, put forth by Arthur Okun, that the
                unemployment rate decreases about 1 percentage
                point for every 3 percent increase in real GDP.
                Later research and data have shown that the
                relationship between output and unemployment
                is not as stable as Okun's "Law" predicts


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