Glossary

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Glossary Entries
Word(s)	Definition	Image	Caption	Link	Source
absolute advantage	In the production of a good, one person can produce more of a good in a unit of time than another person.
aggregate expenditure model	The relationship between planned spending and output.
aggregate production function	A combination of an economy’s physical capital stock, labor hours, human capital, knowledge, natural resources, and social infrastructure that produces output (real GDP).
aggregate spending	The total amount of spending by households, firms, and the government on the goods and services that go into real GDP.
annualized interest rate	The interest rate earned each year on a loan that lasts many years.
annuities	An asset that pays out a certain amount each year while you are alive and insures against the uncertain time of your death.
appreciation	An increase in the price of a currency.
appreciation	An increase in the price of a currency.
appreciation	An increase in the price of a currency.
appreciation	An increase in the price of a currency.
arbitrage	The act of buying and then selling an asset to take advantage of profit opportunities.
arbitrage	The act of buying and then selling an asset to take advantage of profit opportunities.
autonomous inflation	The level of inflation when the output gap is zero.
autonomous inflation	The level of inflation when the output gap is zero.
Autonomous spending	The amount of spending that there would be in an economy if income were zero.
Autonomous spending	The amount of spending that there would be in an economy if income were zero.
average propensity to consume	The ratio of consumption to disposable income.
average propensity to consume	The ratio of consumption to disposable income.
average tax rate	The ratio of total taxes paid to income.
average tax rate	The ratio of total taxes paid to income.
balanced growth	When the growth rate of the capital stock and the output growth rate are equal.
balanced growth	When the growth rate of the capital stock and the output growth rate are equal.
bank failure	When a bank closes because it is unable to meet its depositors’ demands.
bank failure	When a bank closes because it is unable to meet its depositors’ demands.
barter	The exchange of goods and services without money.
barter	The exchange of goods and services without money.
capital stock	The total amount of physical capital in an economy.
capital stock	The total amount of physical capital in an economy.
Capital utilization	The rate at which the existing capital stock is used.
Capital utilization	The rate at which the existing capital stock is used.
circular flow of income	The money flows among the different sectors of an economy as individuals and firms buy and sell goods and services.
circular flow of income	The money flows among the different sectors of an economy as individuals and firms buy and sell goods and services.
classical dichotomy	The dichotomy that real variables are determined independently of nominal variables.
classical dichotomy	The dichotomy that real variables are determined independently of nominal variables.
commitment problem	The situation when a government is not able to make credible promises to pursue actions regardless of how others respond to those actions.
commitment problem	The situation when a government is not able to make credible promises to pursue actions regardless of how others respond to those actions.
commitment problem	The situation when a government is not able to make credible promises to pursue actions regardless of how others respond to those actions.
commitment problem	The situation when a government is not able to make credible promises to pursue actions regardless of how others respond to those actions.
comparative statics	A technique that allows us to describe how market equilibrium prices and quantities depend on exogenous events.
comparative statics	A technique that allows us to describe how market equilibrium prices and quantities depend on exogenous events.
competitive market	A market that satisfies two conditions: (1) there are many buyers and sellers, and (2) the goods the sellers produce are perfect substitutes.
competitive market	A market that satisfies two conditions: (1) there are many buyers and sellers, and (2) the goods the sellers produce are perfect substitutes.
Competitiveness	The ability of an economy to attract physical capital.
Competitiveness	The ability of an economy to attract physical capital.
Consumer Price Index (CPI)	A price index that uses as the bundle of goods the typical purchases of households.
Consumer Price Index (CPI)	A price index that uses as the bundle of goods the typical purchases of households.
Consumption	The total spending by households on final goods and services.
Consumption	The total spending by households on final goods and services.
consumption function	A relationship between current disposable income and current consumption.
consumption function	A relationship between current disposable income and current consumption.
consumption function	A relationship between current disposable income and current consumption.
consumption function	A relationship between current disposable income and current consumption.
consumption smoothing	The idea that households like to keep their flow of consumption relatively steady over time, smoothing over income changes.
consumption smoothing	The idea that households like to keep their flow of consumption relatively steady over time, smoothing over income changes.
consumption smoothing	The idea that households like to keep their flow of consumption relatively steady over time, smoothing over income changes.
consumption smoothing	The idea that households like to keep their flow of consumption relatively steady over time, smoothing over income changes.
contagion effect	An effect when an outcome in one market effects the beliefs and thus the behavior of participants in other markets, perhaps in another country.
contagion effect	An effect when an outcome in one market effects the beliefs and thus the behavior of participants in other markets, perhaps in another country.
contractionary fiscal policy	Decreases in government purchases or increases in tax rates.
contractionary fiscal policy	Decreases in government purchases or increases in tax rates.
convergence	A growth process where poor countries grow faster than rich countries.
convergence	A growth process where poor countries grow faster than rich countries.
coordination failure	The outcome of a coordination game in which one of the equilibrium outcomes is worse than other equilibria.
coordination failure	The outcome of a coordination game in which one of the equilibrium outcomes is worse than other equilibria.
coordination game	A strategic situation in which there are multiple equilibria.
coordination game	A strategic situation in which there are multiple equilibria.
Correlation	A statistical measure of how closely two variables are related.
Correlation	A statistical measure of how closely two variables are related.
credit market (or loan market)	A market that brings together suppliers of credit, such as households who are saving, and demanders of credit, such as businesses and households who need to borrow.
credit market (or loan market)	A market that brings together suppliers of credit, such as households who are saving, and demanders of credit, such as businesses and households who need to borrow.
credit markets (or loan markets)	A market that brings together suppliers of credit, such as households who are saving, and demanders of credit, such as businesses and households who need to borrow.
credit markets (or loan markets)	A market that brings together suppliers of credit, such as households who are saving, and demanders of credit, such as businesses and households who need to borrow.
crowding out	The situation that occurs when an increase in the government deficit leads to an increase in the real interest rate and to a decrease in spending through reductions in investment and exports.
crowding out	The situation that occurs when an increase in the government deficit leads to an increase in the real interest rate and to a decrease in spending through reductions in investment and exports.
currency board	A fixed exchange rate regime in which each unit of domestic currency is backed by holding the foreign currency, valued at the fixed exchange rate.
currency board	A fixed exchange rate regime in which each unit of domestic currency is backed by holding the foreign currency, valued at the fixed exchange rate.
currency board	A fixed exchange rate regime in which each unit of domestic currency is backed by holding the foreign currency, valued at the fixed exchange rate.
currency board	A fixed exchange rate regime in which each unit of domestic currency is backed by holding the foreign currency, valued at the fixed exchange rate.
current account balance	The difference between the value of exports and imports of goods and services plus net income from foreign assets.
current account balance	The difference between the value of exports and imports of goods and services plus net income from foreign assets.
cyclical unemployment	The component of unemployment that depends on the business cycle.
cyclical unemployment	The component of unemployment that depends on the business cycle.
deflation	A sustained decrease in the price level.
deflation	A sustained decrease in the price level.
dependency ratio	The ratio of retirees to workers.
dependency ratio	The ratio of retirees to workers.
deposit insurance	A government program that insures the deposits (subject to some limits) of individuals at banks.
deposit insurance	A government program that insures the deposits (subject to some limits) of individuals at banks.
Depreciation	The amount of capital stock that an economy loses each year due to wear and tear.
Depreciation	The amount of capital stock that an economy loses each year due to wear and tear.
depreciation rate	The fraction of the capital stock that wears out each year.
depreciation rate	The fraction of the capital stock that wears out each year.
devaluation	A decrease in the value of a currency in a fixed exchange rate.
devaluation	A decrease in the value of a currency in a fixed exchange rate.
diminishing marginal product	The more an input is being used, the less is its marginal product.
diminishing marginal product	The more an input is being used, the less is its marginal product.
diminishing marginal product of capital	The more physical capital that is being used, the less additional output is obtained from additional physical capital.
diminishing marginal product of capital	The more physical capital that is being used, the less additional output is obtained from additional physical capital.
diminishing marginal product of labor	The more labor that is being used, the less additional output is obtained from additional labor.
diminishing marginal product of labor	The more labor that is being used, the less additional output is obtained from additional labor.
discount rate	The interest rate paid by banks on loans from the Fed.
discount rate	The interest rate paid by banks on loans from the Fed.
discouraged workers	Someone who would like a job but who has stopped searching and is therefore classified as out of the labor force rather than unemployed.
discouraged workers	Someone who would like a job but who has stopped searching and is therefore classified as out of the labor force rather than unemployed.
disposable income	Income after taxes are paid to the government.
disposable income	Income after taxes are paid to the government.
disposable income	Income after taxes are paid to the government.
disposable income	Income after taxes are paid to the government.
durable goods	Goods that last over many uses.
durable goods	Goods that last over many uses.
Durable goods	Goods that last over many uses.
Durable goods	Goods that last over many uses.
efficiency wages	Wages in excess of the equilibrium real wage that are paid by firms to provide incentives for their workers to perform their duties.
efficiency wages	Wages in excess of the equilibrium real wage that are paid by firms to provide incentives for their workers to perform their duties.
employment rate	The number of employed divided by the civilian labor force.
employment rate	The number of employed divided by the civilian labor force.
endogenous	Something that is explained within our analysis.
endogenous	Something that is explained within our analysis.
endogenous	Something that is explained within our analysis.
endogenous	Something that is explained within our analysis.
equilibrium	An equilibrium price and an equilibrium quantity such that the quantity supplied equals the quantity demanded at the equilibrium price.
equilibrium	An equilibrium price and an equilibrium quantity such that the quantity supplied equals the quantity demanded at the equilibrium price.
equilibrium quantity	The quantity supplied and demanded at the equilibrium price.
equilibrium quantity	The quantity supplied and demanded at the equilibrium price.
exchange rate	The price of one currency in terms of another.
exchange rate	The price of one currency in terms of another.
exogenous	Something that comes from outside a model and is not explained in our analysis.
exogenous	Something that comes from outside a model and is not explained in our analysis.
exogenous variable	A variable determined outside the model that is not explained in the analysis.
exogenous variable	A variable determined outside the model that is not explained in the analysis.
exogenous variable	A variable determined outside the model that is not explained in the analysis.
exogenous variable	A variable determined outside the model that is not explained in the analysis.
fiat money	Intrinsically useless pieces of paper not backed by any physical commodity that nevertheless attain value in exchange.
fiat money	Intrinsically useless pieces of paper not backed by any physical commodity that nevertheless attain value in exchange.
fiscal policy	Changes in taxation and the level of government purchases, typically under the control of a country’s lawmakers.
fiscal policy	Changes in taxation and the level of government purchases, typically under the control of a country’s lawmakers.
Fiscal policy	Changes in taxation and the level of government purchases, typically under the control of a country’s lawmakers.
Fiscal policy	Changes in taxation and the level of government purchases, typically under the control of a country’s lawmakers.
Fisher equation	A formula for converting from nominal interest rates to real interest rates: the real interest rate equals the nominal interest rate minus the inflation rate.
Fisher equation	A formula for converting from nominal interest rates to real interest rates: the real interest rate equals the nominal interest rate minus the inflation rate.
Fisher equation	A formula for converting from nominal interest rates to real interest rates: the real interest rate equals the nominal interest rate minus the inflation rate.
Fisher equation	A formula for converting from nominal interest rates to real interest rates: the real interest rate equals the nominal interest rate minus the inflation rate.
fixed exchange rate	A regime in which a central bank uses its tools to target the value of the domestic currency in terms of a foreign currency.
fixed exchange rate	A regime in which a central bank uses its tools to target the value of the domestic currency in terms of a foreign currency.
flexible exchange rates	A system in which market forces determine exchange rates.
flexible exchange rates	A system in which market forces determine exchange rates.
Flexible prices	Prices that adjust immediately to shifts in supply and demand curves so that markets are always in equilibrium.
Flexible prices	Prices that adjust immediately to shifts in supply and demand curves so that markets are always in equilibrium.
foreign exchange markets	The place where suppliers and demanders of currencies meet and trade.
foreign exchange markets	The place where suppliers and demanders of currencies meet and trade.
frictional unemployment	The unemployment that occurs when workers are moving between jobs.
frictional unemployment	The unemployment that occurs when workers are moving between jobs.
fully funded Social Security system	A system in which the government taxes income and invests it on behalf of the household, paying back the saving with interest during retirement years.
fully funded Social Security system	A system in which the government taxes income and invests it on behalf of the household, paying back the saving with interest during retirement years.
globalization	The increasing ability of goods, capital, labor, and information to flow among countries.
globalization	The increasing ability of goods, capital, labor, and information to flow among countries.
government budget constraint	A limit stating that the deficit must be financed by issuing government debt.
government budget constraint	A limit stating that the deficit must be financed by issuing government debt.
government debt	The total outstanding obligations of a government at a point in time.
government debt	The total outstanding obligations of a government at a point in time.
government deficit	The difference between government outlays and revenues.
government deficit	The difference between government outlays and revenues.
Government purchases	Spending by the government on goods and services.
Government purchases	Spending by the government on goods and services.
government revenues	Money that flows into the government sector from households and firms, largely through taxation.
government revenues	Money that flows into the government sector from households and firms, largely through taxation.
government surplus	Total tax revenues collected by the governments less its purchases of goods and services and transfers to households.
government surplus	Total tax revenues collected by the governments less its purchases of goods and services and transfers to households.
growth accounting	An accounting method that shows how changes in real GDP in an economy are due to changes in available inputs.
growth accounting	An accounting method that shows how changes in real GDP in an economy are due to changes in available inputs.
growth rate	The change in a variable over time divided by its value in the beginning period.
growth rate	The change in a variable over time divided by its value in the beginning period.
growth rate	The change in a variable over time divided by its value in the beginning period.
growth rate	The change in a variable over time divided by its value in the beginning period.
growth rate	The change in a variable over time divided by its value in the beginning period.
growth rate	The change in a variable over time divided by its value in the beginning period.
Human capital	The skills and knowledge that are embodied within workers.
Human capital	The skills and knowledge that are embodied within workers.
hyperinflation	A period of very high and often escalating inflation.
hyperinflation	A period of very high and often escalating inflation.
illiquid	Not capable of being easily and quickly exchanged for cash.
illiquid	Not capable of being easily and quickly exchanged for cash.
income effect	As income increases, households choose to consume more of everything, including leisure.
income effect	As income increases, households choose to consume more of everything, including leisure.
individual labor supply curve	A curve that indicates how many hours of labor an individual supplies at different values of the real wage.
individual labor supply curve	A curve that indicates how many hours of labor an individual supplies at different values of the real wage.
inflation rate	The growth rate of the price index from one year to the next.
inflation rate	The growth rate of the price index from one year to the next.
inflation rate	The growth rate of the price index from one year to the next.
inflation rate	The growth rate of the price index from one year to the next.
inflation rate	The growth rate of the price index from one year to the next.
inflation rate	The growth rate of the price index from one year to the next.
inflation targeting	A regime in which the central bank uses its tools to set the inflation rate as close as possible to a target.
inflation targeting	A regime in which the central bank uses its tools to set the inflation rate as close as possible to a target.
inflation tax	A tax occurring when the government prints money to finance its deficit.
inflation tax	A tax occurring when the government prints money to finance its deficit.
inflation tax	A tax occurring when the government prints money to finance its deficit.
inflation tax	A tax occurring when the government prints money to finance its deficit.
intermediate goods and services	Products that are used—and completely used up—in the production of other goods and services.
intermediate goods and services	Products that are used—and completely used up—in the production of other goods and services.
intertemporal budget constraint	A limit stating that the discounted present value of taxes minus the discounted present value of outlays (excluding interest on the debt) must equal the current stock of debt outstanding.
intertemporal budget constraint	A limit stating that the discounted present value of taxes minus the discounted present value of outlays (excluding interest on the debt) must equal the current stock of debt outstanding.
Inventory investment	The change in inventories of final goods.
Inventory investment	The change in inventories of final goods.
investment	The purchase of new goods that increase capital stock, allowing an economy to produce more output in the future.
investment	The purchase of new goods that increase capital stock, allowing an economy to produce more output in the future.
Investment	The purchase of new goods that increase capital stock, allowing an economy to produce more output in the future.
Investment	The purchase of new goods that increase capital stock, allowing an economy to produce more output in the future.
investment rate	The total investment as a fraction of GDP.
investment rate	The total investment as a fraction of GDP.
Knowledge	The blueprints that describe a production process.
Knowledge	The blueprints that describe a production process.
labor demand	The amount of labor that firms want to hire at a given real wage.
labor demand	The amount of labor that firms want to hire at a given real wage.
labor force	All (civilian) individuals who are either working or actively looking for work.
labor force	All (civilian) individuals who are either working or actively looking for work.
Labor hours	The total hours worked in an economy, measured as the number of people employed times the average hours they work.
Labor hours	The total hours worked in an economy, measured as the number of people employed times the average hours they work.
labor market	The market that brings together households who supply labor services and firms who demand labor as an input into the production process.
labor market	The market that brings together households who supply labor services and firms who demand labor as an input into the production process.
labor market	The market that brings together households who supply labor services and firms who demand labor as an input into the production process.
labor market	The market that brings together households who supply labor services and firms who demand labor as an input into the production process.
law of demand	People consume more of a good when its price decreases and less of a good when its price increases.
law of demand	People consume more of a good when its price decreases and less of a good when its price increases.
law of one price	Different prices for the same good or service will not persist because arbitrage eliminates such differences.
law of one price	Different prices for the same good or service will not persist because arbitrage eliminates such differences.
life-cycle model	A model studying how an individual chooses a lifetime pattern of saving and consumption given a lifetime budget constraint.
life-cycle model	A model studying how an individual chooses a lifetime pattern of saving and consumption given a lifetime budget constraint.
life-cycle model of consumption	A model studying how an individual chooses a lifetime pattern of saving and consumption given a lifetime budget constraint.
life-cycle model of consumption	A model studying how an individual chooses a lifetime pattern of saving and consumption given a lifetime budget constraint.
loan-deposit ratio	The total amount of loans made by banks divided by the total amount of deposits in banks.
loan-deposit ratio	The total amount of loans made by banks divided by the total amount of deposits in banks.
long-run neutrality of money	The fact that changes in the money supply have no long-run effect on real variables.
long-run neutrality of money	The fact that changes in the money supply have no long-run effect on real variables.
Macroeconomics	The study of the economy as a whole.
Macroeconomics	The study of the economy as a whole.
marginal product of capital	The extra output obtained from one more unit of capital.
marginal product of capital	The extra output obtained from one more unit of capital.
marginal product of labor	The amount of extra output produced from one extra hour of labor input.
marginal product of labor	The amount of extra output produced from one extra hour of labor input.
marginal propensity to consume	The amount by which consumption increases when disposable income increases by a dollar.
marginal propensity to consume	The amount by which consumption increases when disposable income increases by a dollar.
marginal propensity to consume	The amount consumption increases when disposable income increases by a dollar.
marginal propensity to consume	The amount consumption increases when disposable income increases by a dollar.
marginal propensity to save	The amount by which saving increases when disposable income increases by a dollar.
marginal propensity to save	The amount by which saving increases when disposable income increases by a dollar.
marginal tax rates	The tax rate paid on additional income.
marginal tax rates	The tax rate paid on additional income.
market demand curve	The number of units of a good or a service demanded at each price.
market demand curve	The number of units of a good or a service demanded at each price.
market supply curve	The number of units of a good or a service supplied at each price.
market supply curve	The number of units of a good or a service supplied at each price.
maturities	The term in which an asset comes due.
maturities	The term in which an asset comes due.
maturity	The time when the final payment on a loan is due.
maturity	The time when the final payment on a loan is due.
medium of exchange	Anything that will be widely accepted in exchange for goods and services.
medium of exchange	Anything that will be widely accepted in exchange for goods and services.
microeconomics	The study of the choices made by individuals and firms, as well as how individuals and firms interact with each other through markets and other mechanisms.
microeconomics	The study of the choices made by individuals and firms, as well as how individuals and firms interact with each other through markets and other mechanisms.
monetary policy	Changes in interest rates and other tools that are under the control of the monetary authority of a country (the central bank).
monetary policy	Changes in interest rates and other tools that are under the control of the monetary authority of a country (the central bank).
monetary transmission mechanism	A mechanism explaining how the actions of a central bank affect aggregate economic variables, in particular real GDP.
monetary transmission mechanism	A mechanism explaining how the actions of a central bank affect aggregate economic variables, in particular real GDP.
monetary transmission mechanism	A mechanism explaining how the actions of a central bank affect aggregate economic variables, in particular real GDP.
monetary transmission mechanism	A mechanism explaining how the actions of a central bank affect aggregate economic variables, in particular real GDP.
moral hazard	An incentive problem that arises when the provision of insurance leads individuals to make riskier choices.
moral hazard	An incentive problem that arises when the provision of insurance leads individuals to make riskier choices.
multiplier	The amount by which a change in autonomous spending must be multiplied to give the change in output, equal to 1 divided by (1 – the marginal propensity to spend).
multiplier	The amount by which a change in autonomous spending must be multiplied to give the change in output, equal to 1 divided by (1 – the marginal propensity to spend).
multiplier	The amount by which a change in autonomous spending must be multiplied to give the change in output, equal to 1 divided by (1 – the marginal propensity to spend).
multiplier	The amount by which a change in autonomous spending must be multiplied to give the change in output, equal to 1 divided by (1 – the marginal propensity to spend).
national income identity	The condition that production is the sum of consumption, investment, government purchases, and net exports.
national income identity	The condition that production is the sum of consumption, investment, government purchases, and net exports.
national income identity	Production equals the sum of consumption plus investment plus government purchases plus net exports.
national income identity	Production equals the sum of consumption plus investment plus government purchases plus net exports.
national savings	The sum of private and government saving.
national savings	The sum of private and government saving.
national savings	The sum of private and government saving.
national savings	The sum of private and government saving.
National savings	The sum of private and government saving.
National savings	The sum of private and government saving.
natural rate of unemployment	The amount of unemployment we expect in an economy that is operating at full employment.
natural rate of unemployment	The amount of unemployment we expect in an economy that is operating at full employment.
natural resources	Oil, coal, and other mineral deposits; agricultural and forest lands; and other resources used in the production process.
natural resources	Oil, coal, and other mineral deposits; agricultural and forest lands; and other resources used in the production process.
Natural resources	Oil, coal, and other mineral deposits; agricultural and forest lands; and other resources used in the production process.
Natural resources	Oil, coal, and other mineral deposits; agricultural and forest lands; and other resources used in the production process.
net exports	Exports minus imports.
net exports	Exports minus imports.
net exports	Exports minus imports.
net exports	Exports minus imports.
Net exports	Exports minus imports.
Net exports	Exports minus imports.
Net exports	Exports minus imports.
Net exports	Exports minus imports.
nominal exchange rate	The price of one currency in terms of another.
nominal exchange rate	The price of one currency in terms of another.
nominal gross domestic product (nominal GDP)	The market value of the final goods and services produced by an economy in a given period of time.
nominal gross domestic product (nominal GDP)	The market value of the final goods and services produced by an economy in a given period of time.
nominal interest factor	A factor, equal to 1 + the nominal interest rate, used to convert dollars today into dollars next year.
nominal interest factor	A factor, equal to 1 + the nominal interest rate, used to convert dollars today into dollars next year.
nominal interest rate	The number of additional dollars that must be repaid for every dollar that is borrowed.
nominal interest rate	The number of additional dollars that must be repaid for every dollar that is borrowed.
nominal interest rate	The number of additional dollars that must be repaid for every dollar that is borrowed.
nominal interest rate	The number of additional dollars that must be repaid for every dollar that is borrowed.
Nominal variables	A variable defined and measured in terms of money.
Nominal variables	A variable defined and measured in terms of money.
nominal wages	The wage in dollars paid to workers per unit of time.
nominal wages	The wage in dollars paid to workers per unit of time.
nonexcludable good	A good (or resource) for which it is impossible to selectively deny access.
nonexcludable good	A good (or resource) for which it is impossible to selectively deny access.
nonrenewable (exhaustible) resource	A resource that does not regenerate over time.
nonrenewable (exhaustible) resource	A resource that does not regenerate over time.
nonrival	A good for which one person’s consumption of that good does not prevent others from also consuming it.
nonrival	A good for which one person’s consumption of that good does not prevent others from also consuming it.
nonrival good	A good where one person’s consumption of that good does not prevent others from also consuming it.
nonrival good	A good where one person’s consumption of that good does not prevent others from also consuming it.
open economy	An economy that trades with other countries.
open economy	An economy that trades with other countries.
open-market operations	Purchases and sales of government debt by a central bank.
open-market operations	Purchases and sales of government debt by a central bank.
opportunity cost	What you must give up to carry out an action.
opportunity cost	What you must give up to carry out an action.
output gap	The difference between potential output and actual output.
output gap	The difference between potential output and actual output.
overvalued	The price of a currency is too high compared to the ratio of price levels in the two countries.
overvalued	The price of a currency is too high compared to the ratio of price levels in the two countries.
Physical capital	The total amount of machines and production facilities used in production.
Physical capital	The total amount of machines and production facilities used in production.
planned spending	All expenditures in an economy except for unplanned inventory investment.
planned spending	All expenditures in an economy except for unplanned inventory investment.
potential output	The amount of real GDP the economy produces when the labor market is in equilibrium and capital goods are not lying idle.
potential output	The amount of real GDP the economy produces when the labor market is in equilibrium and capital goods are not lying idle.
potential output	The amount of real GDP the economy produces when the labor market is in equilibrium and capital goods are not lying idle.
potential output	The amount of real GDP the economy produces when the labor market is in equilibrium and capital goods are not lying idle.
potential output	The amount of real GDP the economy produces when the labor market is in equilibrium and capital goods are not lying idle.
potential output	The amount of real GDP the economy produces when the labor market is in equilibrium and capital goods are not lying idle.
price level	A measure of average prices in the economy.
price level	A measure of average prices in the economy.
price level	A measure of average prices in the economy.
price level	A measure of average prices in the economy.
price level	A measure of average prices in the economy.
price level	A measure of average prices in the economy.
price level	A measure of average prices in the economy.
price level	A measure of average prices in the economy.
price-adjustment equation	An equation that describes how prices adjust in response to the output gap, given autonomous inflation.
price-adjustment equation	An equation that describes how prices adjust in response to the output gap, given autonomous inflation.
primary surplus	The inverse of the primary deficit.
primary surplus	The inverse of the primary deficit.
prisoners’ dilemma	There is a cooperative outcome that both players would prefer to the Nash equilibrium of the game.
prisoners’ dilemma	There is a cooperative outcome that both players would prefer to the Nash equilibrium of the game.
private savings	The net amount saved by households in the economy.
private savings	The net amount saved by households in the economy.
private savings	The net amount saved by households in the economy.
private savings	The net amount saved by households in the economy.
Process development	Finding improvements in a firm’s operations and methods of manufacture to reduce the costs of production.
Process development	Finding improvements in a firm’s operations and methods of manufacture to reduce the costs of production.
procyclical	An economic variable that typically moves in the same direction as real GDP, increasing when GDP increases and decreasing when GDP decreases.
procyclical	An economic variable that typically moves in the same direction as real GDP, increasing when GDP increases and decreasing when GDP decreases.
productivity	The effectiveness of an economy for producing output.
productivity	The effectiveness of an economy for producing output.
property rights	An individual’s (or institution’s) legal right to make all decisions regarding the use of a particular resource.
property rights	An individual’s (or institution’s) legal right to make all decisions regarding the use of a particular resource.
property rights	An individual’s (or institution’s) legal right to make all decisions regarding the use of a particular resource.
property rights	An individual’s (or institution’s) legal right to make all decisions regarding the use of a particular resource.
quantity equation	An equation stating that the supply of money times the velocity of money equals nominal GDP.
quantity equation	An equation stating that the supply of money times the velocity of money equals nominal GDP.
quantity theory of money	A relationship among money, output, and prices that is used to study inflation.
quantity theory of money	A relationship among money, output, and prices that is used to study inflation.
rate of inflation	The growth rate of the price index from one year to the next.
rate of inflation	The growth rate of the price index from one year to the next.
real exchange rate	A measure of the price of goods and services in one country relative to another when prices are expressed in a common currency.
real exchange rate	A measure of the price of goods and services in one country relative to another when prices are expressed in a common currency.
real gross domestic product (real GDP)	A measure of production that has been corrected for any changes in overall prices.
real gross domestic product (real GDP)	A measure of production that has been corrected for any changes in overall prices.
Real gross domestic product (real GDP)	A measure of production that has been corrected for any changes in overall prices.
Real gross domestic product (real GDP)	A measure of production that has been corrected for any changes in overall prices.
real gross domestic product [real GDP]	A measure of production that has been corrected for any changes in overall prices.
real gross domestic product [real GDP]	A measure of production that has been corrected for any changes in overall prices.
real interest rate	The rate of return specified in terms of goods, not money.
real interest rate	The rate of return specified in terms of goods, not money.
real interest rate	The rate of return specified in terms of goods, not money.
real interest rate	The rate of return specified in terms of goods, not money.
real interest rate	The rate of return specified in terms of goods, not money.
real interest rate	The rate of return specified in terms of goods, not money.
real interest rate	The rate of return specified in terms of goods, not money.
real interest rate	The rate of return specified in terms of goods, not money.
real variables	A variable defined and measured in terms other than money, often in terms of real GDP.
real variables	A variable defined and measured in terms other than money, often in terms of real GDP.
real wage	The nominal wage (the wage in dollars) divided by the price level.
real wage	The nominal wage (the wage in dollars) divided by the price level.
real wage	The nominal wage (the wage in dollars) divided by the price level.
real wage	The nominal wage (the wage in dollars) divided by the price level.
real wage	The nominal wage (the wage in dollars) divided by the price level.
real wage	The nominal wage (the wage in dollars) divided by the price level.
real wage	The nominal wage (the wage in dollars) divided by the price level.
real wage	The nominal wage (the wage in dollars) divided by the price level.
real wage	The nominal wage corrected for inflation.
real wage	The nominal wage corrected for inflation.
reserve requirement	The level of reserves that the monetary authority requires a bank to hold.
reserve requirement	The level of reserves that the monetary authority requires a bank to hold.
reserves	Deposits received by a bank that it must set aside rather than loan to firms and households.
reserves	Deposits received by a bank that it must set aside rather than loan to firms and households.
Ricardian equivalence	A balance that occurs when a decrease in taxes leads to an equal increase in private saving and thus no change in either the real interest rate or investment.
Ricardian equivalence	A balance that occurs when a decrease in taxes leads to an equal increase in private saving and thus no change in either the real interest rate or investment.
risk premium	A part of the interest rate needed to compensate the lender for the risk of default.
risk premium	A part of the interest rate needed to compensate the lender for the risk of default.
savings rate	The ratio of household savings to disposable income.
savings rate	The ratio of household savings to disposable income.
Search theory	A framework for understanding the flows of workers across periods of employment and unemployment along with the creation of job vacancies by firms.
Search theory	A framework for understanding the flows of workers across periods of employment and unemployment along with the creation of job vacancies by firms.
Social infrastructure	The general business climate, including any relevant features of the culture.
Social infrastructure	The general business climate, including any relevant features of the culture.
Stabilization policy	The use of monetary and fiscal policies to prevent large fluctuations in real GDP.
Stabilization policy	The use of monetary and fiscal policies to prevent large fluctuations in real GDP.
standardized deficit (or structural deficit)	A deficit that occurs when a government budget is in deficit because of expansionary fiscal policy.
standardized deficit (or structural deficit)	A deficit that occurs when a government budget is in deficit because of expansionary fiscal policy.
Sticky prices	Prices that do not adjust immediately to shifts in supply and demand curves so that markets are not always in equilibrium.
Sticky prices	Prices that do not adjust immediately to shifts in supply and demand curves so that markets are not always in equilibrium.
stock	Any variable that can be measured in principle at an instant of time.
stock	Any variable that can be measured in principle at an instant of time.
store of value	Anything that can reliably be expected to maintain its worth over time.
store of value	Anything that can reliably be expected to maintain its worth over time.
substitution effect	As the real wage increases, households substitute away from leisure toward consumption of goods and service and thus supply more labor.
substitution effect	As the real wage increases, households substitute away from leisure toward consumption of goods and service and thus supply more labor.
Supply and demand	A framework that explains and predicts the equilibrium price and equilibrium quantity of a good.
Supply and demand	A framework that explains and predicts the equilibrium price and equilibrium quantity of a good.
tax smoothing	To reduce the distortionary effects of taxes, a government will finance some current spending by issuing debt to spread the tax burden over time.
tax smoothing	To reduce the distortionary effects of taxes, a government will finance some current spending by issuing debt to spread the tax burden over time.
Taylor rule	A rule for monetary policy in which the target real interest rate increases when inflation is too high and decreases when output is too low.
Taylor rule	A rule for monetary policy in which the target real interest rate increases when inflation is too high and decreases when output is too low.
Taylor rule	A rule for monetary policy in which the target real interest rate increases when inflation is too high and decreases when output is too low.
Taylor rule	A rule for monetary policy in which the target real interest rate increases when inflation is too high and decreases when output is too low.
technology	A catchall term comprising knowledge, social infrastructure, natural resources, and any other inputs to aggregate production that have not been included elsewhere.
technology	A catchall term comprising knowledge, social infrastructure, natural resources, and any other inputs to aggregate production that have not been included elsewhere.
technology frontier	Where the most advanced production technologies are available.
technology frontier	Where the most advanced production technologies are available.
technology transfer	The movement of knowledge and advanced production techniques across national borders.
technology transfer	The movement of knowledge and advanced production techniques across national borders.
term structure of interest rates	The relationship between the actual and expected returns on assets, which are identical except for their maturities.
term structure of interest rates	The relationship between the actual and expected returns on assets, which are identical except for their maturities.
time budget constraint	The restriction that the sum of the time you spend on all your different activities must be exactly 24 hours each day.
time budget constraint	The restriction that the sum of the time you spend on all your different activities must be exactly 24 hours each day.
tradable goods	Goods that can be easily and cheaply transported from one place to another, which means they can be easily arbitraged.
tradable goods	Goods that can be easily and cheaply transported from one place to another, which means they can be easily arbitraged.
transfers	A cash payment from the government to individuals and firms.
transfers	A cash payment from the government to individuals and firms.
transfers	A cash payment from the government to individuals and firms.
transfers	A cash payment from the government to individuals and firms.
uncovered interest parity	A relationship between interest rates in two countries and the expected change in the exchange rate that holds when the return earned by investing in assets denominated in different currencies are equal.
uncovered interest parity	A relationship between interest rates in two countries and the expected change in the exchange rate that holds when the return earned by investing in assets denominated in different currencies are equal.
unemployment duration	The amount of time a typical worker spends searching for a new job.
unemployment duration	The amount of time a typical worker spends searching for a new job.
unemployment insurance	A payment made by the government to those who are unemployed.
unemployment insurance	A payment made by the government to those who are unemployed.
unemployment rate	The number of unemployed individuals divided by the sum of the number employed and the number unemployed.
unemployment rate	The number of unemployed individuals divided by the sum of the number employed and the number unemployed.
unemployment rate	The percentage of people who are not currently employed but are actively seeking a job.
unemployment rate	The percentage of people who are not currently employed but are actively seeking a job.
unemployment rate	The number of unemployed individuals divided by the sum of the number employed and the number unemployed.
unemployment rate	The number of unemployed individuals divided by the sum of the number employed and the number unemployed.
unit of account	A standardized measure for economic transactions.
unit of account	A standardized measure for economic transactions.
Unplanned inventory investment	An increase in inventories that comes about because firms have sold less than they anticipated.
Unplanned inventory investment	An increase in inventories that comes about because firms have sold less than they anticipated.
velocity of money	Nominal GDP divided by the money supply.
velocity of money	Nominal GDP divided by the money supply.
wealth effect	The effect on consumption of a change in wealth.
wealth effect	The effect on consumption of a change in wealth.
yield curve	The current annual return for assets of different maturities.
yield curve	The current annual return for assets of different maturities.
zero lower bound	The fact that the Fed cannot push nominal interest rates below zero.
zero lower bound	The fact that the Fed cannot push nominal interest rates below zero.

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