macroecon definitions

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barter: the direct trade of goods or services for other goods or services
Low inflation: typically means inflation between 1 and 3% per year
stabilization policies: government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps
Stock: a measure that is defined at a point in time
discretionary fiscal policy: changes in government spending and taxation deliberately made to stabilize planned aggregate expenditure
Open-market sale: the sale by the central bank of government bonds for the purpose of reducing bank reserves
Consumption function: the relationship between consumption spending and its determinants, such as disposable (after-tax) income
Inflation adjustment (IA) line: a horizontal line showing the current rate of inflation, as determined by past expectations and pricing decisions
Okun's law: states that each extra percentage point of cyclical unemployment is associated with about a 2-percentage-point increase in the output gap, measured in relation to potential output
consumer price index (CPI): for any period, measures the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year, called the base year
Life-cycle saving: saving to meet long-term objectives, such as retirement, university attendance, or the purchase of a home
Gross investment: the sum of private-sector and government investment
Wealth effect: The tendency of changes in asset prices to affect households' wealth and thus their spending on consumption goods and services
Flat money: an asset with no intrinsic value, such as paper currency, that is generally accepted as a means of payment for purchases and the settling of debts
100 percent reserve banking: a situation in which banks' reserves equal 100 percent of their deposits
Risk premium: the rate of return that financial investors require to hold risky assets minus the rate of return on safe assets
Zero inflation: when the price level stays roughly constant from one year to the next
reserve-deposit ratio: bank reserves divided by deposits
Store of value: an asset that serves as a means of holding wealth
foreign trade effect: the hypothesis that net exports will be inversely elated to the overall price level, and therefore that aggregate demand and the price level will be inversely related
Average labour productivity: output per employed worker
Natural rate of unemployment (or u*): the part of the total unemployment rate that is attributable to frictional, structural and seasonal unemployment; equivalently, the unemployment rate that prevails when cyclical unemployment is zero, so the economy has neither a recessionary nor an expansionary output gap
Nominal quantity: a quantity that is measured in terms of its current dollar value
Output gap (or Y* - Y): the difference between the economy's potential output and its actual output at a point in time
Long-run aggregate supply (LRAS) curve: a relationship between potential output and the overall price level; the vertical LRAS curve indicates that potential output is independent of the overall price level
Present value (PV): or present discounted value, is the value of a sum of money today - that is, the value in the current or initial period
Frictional unemployment: the short-term unemployment associated with the process of matching workers with jobs
Downward nominal wage hypothesis: the claim that low levels of inflation will reduce efficiency because real wage cuts will then typically require nominal wage cuts, which will be resisted
Coupon payments: regular interest payments made to the bond holder
Money demand curve: relates the aggregate quantity of money demanded, M, to the nominal interest rate, i; because an increase in the nominal interest rate increases the opportunity cost of holding money, which reduces the quantity of money demanded, the money demand curve slopes down
Phillips curve: a term that typically refers to a statistical relationship between the inflation rate and the unemployment
Deficit: when government officials spend more than they collect in taxes
Short-run aggregate supply curve: a relationship between real output and the overall price level in the short run; the horizontal SRAS curve indicates that firms in the short run meet demand, on average, at existing prices
Seasonal unemployment: unemployment associated with the seasons and/or weather
Closed economy loanable funds model: a theory of real interest rate determination for an economy cut off from international capital markets
value added: for any firm, the market value of its product or service minus the cost of inputs purchased from other firms.
trade surplus: when exports exceed imports - the difference between the value of a country's exports and the value of its imports in a given period
involuntary part-time workers: people who say they would like to work full time but are only able to find part-time work
GDP deflator: a measure of the price level of goods and services included in GDP
key policy rate: the interest rate employed by the central bank as its major policy tool, the key policy rate for the Bank of Canada, which is also called its official interest rate, is the target for the overnight rate
expansionary policies: government policy actions intended to increase planned spending and output
Macroeconomic policies: government actions designed to affect the performance of the economy as a whole
Stock (or equity): a claim to partial ownership of a firm
induced expenditure: the portion of planned aggregate expenditure that depends on output Y
Participation rate: the labour force divided by the working-age participation
net capital inflows: capital inflows minus capital outflows
Income-expenditure multiplier: the effect of a one-unit increase in autonomous aggregate demand on short-run equilibrium output
Long-run Phillips curve: a relationship between the inflation rate and the unemployment rate in the long run; the vertical long-run Phillips curve is drawn at the natural rate of unemployment
trough: the end of a recession, the low point of economic activity prior to a recovery
Long-run equilibrium: a situation in which actual output equals potential output and the inflation rate is stable; graphically, long-run equilbrium occurs when the ADI curve, the IA line, and the LRAS line all intersect at a single point
National wealth: the total value of the real assets in a country
Anticipated inflation: when the rate of inflation turns out to be roughly what most people had expected
Principal amount: the amount originally lent
Final goods or services: goods or services consumed by the ultimate user; because they are the end products of the production process, they are counted as part of GDP.
menu cost: the costs of changing prices
Zero bound on nominal interest rates hypothesis: the claim that because interest rates cannot go below zero, a central bank may be unable to stimulate the economy with rate cuts if the official interest rate is low to begin with
Gross domestic product (GDP): the market value of the final goods and services produced in a country during a given period
Price signal distortion hypothesis: the claim that any substantial amount of change in the price level will make it difficult for market participants to interpret the extent to which price changes involve relative price changes
Capital consumption allowances: accounting allowances for the using up of fixed capital in the production process
bank reserves: cash or similar assets held by commercial banks for the purpose of meeting depositor withdrawals and payments
Portfolio allocation decision: the decision about the forms in which to hold one's wealth
overnight rate target: the interest rate that the Bank of Canada wants to prevail in the financial market where major Canadian institutions borrow and lend funds to settle daily transactions with one another
Dividend: a regular payment received by stockholders for each share that they own
Wealth: the value of assets minus liabilities
closed economy: an economy that neither trades with nor engages in borrowing and lending with the rest of the world
Aggregate supply shock: either an inflation shock or a shock to potential output; adverse aggregate supply shocks of both types reduce output and increase inflation
capital inflows: purchases of domestic assets by foreign households and firms
Open-market purchase: the purchase of government bonds from the public by the central bank for the purpose of increasing the supply of bank reserves
international capital flows: purchases or sales of real and fincancial assets across international borders
Capital losses: decreases in the values of existing assets.
government purchases: purchases by federal, provincial and municipal governments of final goods and services; government purchases do not include government transfer payments, nor do they include interest paid on the public debt
Reserve requirements: set by some central banks, the minimum values of the ratio of bank reserves to bank deposits that commercial banks are allowed to maintain; the Bank of Canada does not set reserve requirements
Accelerating inflation: when the inflation rate rises from one year to the next
Saving: current income minus spending on current needs—a flow
net capital outflows: capital outflows minus capital inflows
Structural unemployment: unemployment that occurs when workers are unable to fill available jobs because they lack the skills, or do not live where jobs are available
deflating (a nominal quantity): the process of dividing a nominal quantity by a price index (such as the CPI) to express the quantity in real terms
Imports: the quantity of goods and services its citizens buy from abroad
Private-sector investment: spending by firms on final goods and services, primarily capital goods and housing
Transfers: a term that refers to both government transfer payments and interest payments on the public debt
contractionary policies: government policy actions designed to reduce planned spending and output
Net international liabilities: the value of financial claims of non-residents on Canadian wealth net of the value of financial claims of Canadian residents against foreign wealth
Standard of living: the degree to which people have access to goods and services that make their lives easier, healthier, safer, and more enjoyable
Expansionary gap: a negative output gap, which occurs when actual output is higher than potential output
Coupon rate: the interest rate promised when a bond is issued
Financial intermediaries: firms that extend credit to borrowers using funds raised from investors
Aggregate demand-inflation curve (ADI): short for aggregate demand/inflation curve, shows the relationship between short-run equilibrium output Y and the rate of inflation π; the name of the curve reflects the fact that short-run equilibrium output is deermined by, and equals, total planned spending in the economy; increases in inflation reduce planned spending and short-run equilibrium output, so the aggregate demand (ADI) curve is downward sloping
M2: all the assets in M1 plus some additional assets that are usable in making payments but at greater cost or inconvenience than currency or chequing accounts
Price index: a measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year
boom: a particularly strong and protracted phase of an expansion
fractional-reserve banking system: a banking system in which bank reserves are less than deposits so that the reserve-deposits so that the reserve-deposit ratio is less than 100 percent
Stable inflation: when the inflation rate stays roughly constant from one year to the next
autonomous expenditure: the portion of planned aggregate expenditure that is independent of output
marginal propensity to consume (MPC): the amount by which consumption rises when disposable income rises by 1$; we assume that 0 < MPC < 1
Bequest saving: saving done for the purpose of leaving an inheritance
Labour force: the total number of employed and unemployed people in the economy
Bank of Canada: Canada's central bank
Recessionary gap: a positive output gap, which occurs when potential output exceeds actual output
Saving rate: saving divided by income
recessions (or contraction): a period in which the economy is growing at a rate significantly below normal
Federal Reserve System: the central bank of the United States; also known as the Fed
real interest rate: the nominal interest rate minus the inflation rate
nominal interest rate: the type of interest rate you usually encounter in everyday life - the price paid per dollar borrowed per year
Commodity money: an asset with intrinsic value, such as a gold or silver coin, that is generally accepted as a means of payment for purchases and settling debts
Deflation: periods when prices in general decrease
Gross saving: the sum of household, corporate, government, and non-resident saving
Price level: the overall level of prices at a point in time as measured by a price index such as the CPI
trade deficit: when imports exceed exports - the difference between the value of a country's imports and the value of its exports in a given period
trade balance (or net exports): the value of a country's exports less the value of its importants in a particular period (quarter or year)
entrepreneurship: behaviour that results in new products, services, technological processes or organizational innovations that are productivity enhancing
Hyperinflation: typically means inflation greater than 500% per year
Discouraged workers: people who say they would like to have a job but have not made an effort to find one in the past four weeks
Money: any asset that can be used as a means of payment for purchases and to settle debt
planned aggregate expenditure (PAE): total planned spending on final goods and services
Unit of account: a basic measure of economic value
capital outflows: purchases of foreign assets by domestic households and firms
expansion: a period in which the economy is growing at a rate significantly above normal
policy reaction function: describes how the action a policymaker takes depends on the state of the economy
Liabilities: the debts one owes
Intermediate gods or services: goods or services used up in the production of final goods and services and therefore not counted as part of GDP
Stagflation: the combination of a recessionary gap and a rising price level
automatic stabilizers: provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines
Precautionary saving: saving for protection against unexpected setbacks, such as the loss of a job
durable goods: long-lived goods purchased for household use
Expectations-augmented Phillips curve model: distinguishes between a short-run Phillips curve and a long-run Phillips curve and argues that short-run Phillips curves shift when expectations about the inflation rates change
Gross National Product (GNP): the market value of goods and services produced by factors of production owned by the residents of a country
Short-run equilibrium: a situation in which inflation equals the value determined by past expectations and pricing decisions, and output equals the level of short-run equilibrium output that is consistant with that inflation rate graphically. Short-run equilibrium occurs at the intersection of the ADI curve and the IA line
M1: sum of currency outstanding and balances held in chequing accounts
Structural policy: government policies aimed at changing the underlying structure or institutions of the nation's economy
Inflation: the rate at which prices in general increase over time
Open economy loanable funds model: a theory of real interest rate determination for an economy open to international capital flows
Adaptive expectations of inflation: a method of forming expectations about the inflation rate that involves looking to past experience, especially recent past experience
Disinflation: when the inflation rate falls from one year to the next
peak: the beginning of a recession, the high point of economic activity prior to a downturn
non-resident saving: the balance between saving provided to the Canadian economy by non-residents and saving provided to foreign economies by residents of Canada
services: includes everything from haircuts and taxi rides to legal and financial services
bank rate: the interest rate that the Bank of Canada charges commercial banks for overnight loans, it corresponds to the upper limit of the Bank of Canada's operating band for the overight rate; for decades, it was the Bank's official interest rate
Open-market operations: open-market purchases and open-market sales
Trade imbalances: when the quantity of exports differs from the quantity of imports
Short-run equilibrium output: the level of output at which output Y equals planned expenditure; the level of output that prevails during the period in which prices are predetermined
fisher effect: the tendency for nominal interest rates to be high when inflation is high and low when inflation is low
Assets: anything of value that one owns
medium of exchange: an asset used in purchasing goods and services
Unanticipated inflation: when the rate of inflation turns out to be substantially different from what most people ahd expected
Monetary policy: central bank management of interest rates in order to achieve macroeconomic objectives
demand for money: the amount of wealth an individual chooses to hold in the form of money
real quantity: a quantity that is measured in constant dollar terms
Relative price: the price of a specific good or service in comparison to the prices of other goods and services
Potential output (or potential GDP or full-employment output): the amount of output (real GDP) that an economy can produce when using its resources, such as capital and labour, at normal rates
Bond: a legal promise to repay a debt, usually including both the principal amount and regular interest payments
flow: a measure that is defined per unit of time
consumption: spending by households on goods and services, such as food, clothing, and entertainment
real-balances effect: the hypothesis that overall wealth in the economy will be inversely related to the overall price level, and therefore that aggregate demand and the price level will be inversely related
non-durable goods: goods that would typically be used only once or be expected to last less than a year
Aggregate demand curve: a relationship between overall spending in the economy and the aggregate price level
Aggregation: the adding up of individual economic variables to obtain economy-wide totals
real GDP: a measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices
Cyclical unemployment: the extra unemployment brought about by periods of recession
Moderate inflation: typically means inflation greater than percent per year
National net worth: the total value of the real assets of a country adjusted for its net foreign liabilities
Diversification: the practice of spreading of one's wealth over a variety of different financial investments to reduce overall risk
modern central banking theory: the view that the central bank changes its official interest rate directly and the commercial banks respond by changing market interest rates
Fallacy of composition: the mistake of falsely assuming that what is true at the level of a particular individual household, firm, or industry is necessarily true at a higher aggregate level
Short-run Phillips curve: a relationship between actual unemployment and the inflation rate for given inflationary expectation
National saving: the sum of gross saving by the household sector, the corporate sector, and the government sector
interest rate effect: the hypothesis that the real interest rate will be directly related to the overall price level, and therefore that aggregate demand and the price level will be inversely related
Future value (FV): the value a sum of money grows to at some date in the future, when it compounds at a given interest rate
depression: a particularly severe or protracted recession
current account: the record of payments and receipts arising from trade in goods and services, from international investment income, and from international transfers
Capital good: a long-lived good, which is itself produced and used to produce other goods and services
European Central Bank: the central bank of the euro zone countries: also known as the ECB
vertical money supply theory: the view that the central bank changes interest rates by shifting a vertical money supply curve
Fiscal policy: decisions that determine the government's budget, including the amount and composition of government expenditures and government revenues
Unemployment rate: the number of unemployed people divided by the labour force
average propensity to consume (APC): consumption divided by disposable income
Capital gains: increases in the value of existing assets
Exports: the quantity of goods and services that a country sells abroad
Net exports: exports minus imports
Surplus: when government officials spend less than they collect in taxes
High inflation: typically means inflation greater than 6 percent per year
Diminishing returns to capital: if the amount of labour and other inputs employed is held constant, then the greater the amount of capital already in use, capital will tend to add to production
nominal GDP: a measure of GDP in which the quantities produced are valued at current-year prices; nominal GDP measures the current dollar value of production
open economy: an economy that trades with and engages in borrowing and lending with other countries
Inflation shock: a sudden change in the normal behaviour of inflation, unrelated to the nation's output gap

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