| Absolute advantage | The ability to produce a good using fewer inputs than another producer |
| Aggregate-demand curve | A curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level |
| Aggregate-supply curve | A curve that shows the quantity of goods and services that firms choose to produce and sell at each price level |
| Appreciation | An increase in the value of a currency as measured by the amount of foreign currency it can buy |
| Automatic stabilizers | Changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession, but that occur without policymakers having to take any deliberate action |
| Balanced trade | A situation in which exports equal imports |
| Bank capital | The resources a bank’s owners have put into the institution |
| Bond | A certificate of indebtedness |
| Budget deficit | A shortfall of tax revenue from government spending |
| Budget surplus | An excess of tax revenue over government spending |
| Capital flight | A large and sudden reduction in the demand for assets located in a country |
| Capital requirement | A government regulation specifying a minimum amount of bank capital |
| Central bank | An institution designed to oversee the banking system and regulate the quantity of money in the economy |
| Circular-flow diagram | A visual model of the economy that shows how dollars flow through markets among households and firms |
| Classical dichotomy | The theoretical separation of nominal variables and real variables |
| Closed economy | An economy that does not interact with other economies in the world |
| Collective bargaining | The process by which unions and firms agree on the terms of employment |
| Commodity money | Money that takes the form of a commodity with intrinsic value |
| Comparative advantage | The ability to produce a good at a lower opportunity cost than another producer |
| Compensating differential | A difference in wages that arises to offset the nonmonetary characteristics of different jobs |
| Confounding variable | An omitted variable that can mislead the researcher because it is related to the variables of interest |
| Consumer price index (CPI) | A measure of the overall cost of the goods and services bought by a typical consumer |
| Consumption | Spending by households on goods and services, with the exception of purchases of new housing |
| core CPI | a measure of the overall cost of consumer goods and services excluding food and energy |
| Cross-sectional data | Aata that presents information about multiple subjects (such as people, firms, or nations) at a given time |
| Crowding out | A decrease in investment that results from government borrowing |
| Crowding-out effect | The offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending |
| Currency | The paper bills and coins in the hands of the public |
| Cyclical unemployment | The deviation of unemployment from its natural rate |
| Data | Factual information, often quantitative, that provides the basis for reasoning and discussion |
| Demand deposits | Balances in bank accounts that depositors can access on demand by writing a check |
| Depreciation | A decrease in the value of a currency as measured by the amount of foreign currency it can buy |
| Depression | A severe recession |
| Discount rate | The interest rate on the loans that the Fed makes to banks |
| Discouraged workers | Individuals who would like to work but have given up looking for a job |
| Discrimination | The offering of different opportunities to similar individuals who differ only by race, ethnicity, gender, age, religion, sexual orientation, or other personal characteristics |
| Econometrics | The subfield of economics that develops tools to analyze data |
| Efficiency wages | Above-equilibrium wages paid by firms to increase worker productivity |
| Experimental data | Data that comes from a researcher running a randomized controlled trial |
| Exports | Goods produced domestically and sold abroad |
| Federal funds rate | The interest rate at which banks make overnight loans to one another |
| Federal Reserve | The central bank of the United States |
| Fiat money | Money without intrinsic value that is used as money by government decree |
| Financial intermediaries | Financial institutions through which savers can indirectly provide funds to borrowers |
| Financial markets | Financial institutions through which savers can directly provide funds to borrowers |
| Financial system | The group of institutions in the economy that help to match one person’s savings with another person’s investment |
| Fiscal policy | The setting of the levels of government spending and taxation by government policymakers |
| Fisher effect | The one-for-one adjustment of the nominal interest rate to the inflation rate |
| Fractional-reserve banking | A banking system in which banks hold only a fraction of deposits as reserves |
| Frictional unemployment | Unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills |
| Gains from trade | The extra benefits (such as more goods, greater variety, or lower opportunity costs) that individuals, regions, or countries obtain by specializing in what they produce relatively efficiently and then trading with others compared to remaining self-sufficient. |
| GDP deflator | A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100 |
| Government purchases | Spending on goods and services by local, state, and federal governments |
| Gross domestic product (GDP) | The market value of all final goods and services produced within a country in a given period |
| Human capital | The knowledge and skills that workers acquire through education, training, and experience |
| Imports | Goods produced abroad and sold domestically |
| Indexed | The automatic correction by law or contract of a dollar amount for the effects of inflation |
| Inflation rate | The percentage change in the price index from the preceding period |
| Inflation tax | The revenue the government raises by creating money |
| Interest on reserves | The interest rate paid to banks on the reserves held in deposit at the Fed |
| Investment | Spending on business capital, residential capital, and inventories |
| Job search | The process by which workers find appropriate jobs given their tastes and skills |
| Labor force | The total number of workers, including both the employed and unemployed |
| Labor-force participation rate | The percentage of the adult population that is in the labor force |
| Leverage | The use of borrowed money to supplement existing funds for investment purposes |
| Leverage ratio | The ratio of assets to bank capital |
| Linear regression | A statistical model in which the dependent variable is linearly related to one or more independent variables, plus a random residual |
| Liquidity | The ease with which an asset can be converted into the economy’s medium of exchange |
| Macroeconomics | The study of economy-wide phenomena, including inflation, unemployment, and economic growth |
| Market for loanable funds | The market in which those who want to save supply funds and those who want to borrow to invest demand funds |
| Medium of exchange | An item that buyers give to sellers when they want to purchase goods and services |
| Menu costs | the costs of changing prices |
| Microeconomics | The study of how households and firms make decisions and how they interact in markets |
| Model of aggregate demand and aggregate supply | The model that most economists use to explain short-run fluctuations in economic activity around its long-run trend |
| Monetary neutrality | The proposition that changes in the money supply do not affect real variables |
| Monetary policy | The setting of the money supply by policymakers in the central bank |
| Money | The set of assets in an economy that people regularly use to buy goods and services |
| Money multiplier | The amount of money that results from each dollar of reserves |
| Money supply | The quantity of money available in the economy |
| Monopsony | A market that has only one buyer |
| Multiple regression | A linear regression model with more than one independent variable |
| Multiplier effect | The additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending |
| Mutual fund | An institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds |
| National saving (saving) | The total income in the economy that remains after paying for consumption and government purchases |
| Natural experiment | A chance event that causes variation in the data similar to that generated by a randomized controlled trial |
| Natural level of output | The production of goods and services that an economy achieves in the long run when unemployment is at its normal rate |
| Natural rate of unemployment | The normal rate of unemployment around which the unemployment rate fluctuates |
| Natural-rate hypothesis | The claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation |
| Net capital outflow | The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners |
| Net exports | Spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports) |
| Nominal exchange rate | The rate at which a person can trade the currency of one country for the currency of another |
| Nominal GDP | The production of goods and services valued at current prices |
| Nominal interest rate | The interest rate as usually reported without a correction for the effects of inflation |
| Nominal variables | Variables measured in monetary units |
| Observational data | Data that come from a researcher observing the world as it presents itself |
| Open economy | An economy that interacts freely with other economies around the world |
| Open-market operations | The purchase and sale of U.S. government bonds by the Fed |
| Opportunity cost | Whatever must be given up to obtain some item |
| Ordinary least squares | A statistical method for estimating parameter values by minimizing the sum of squared residuals |
| Panel data | Data that present information about multiple subjects (such as people, firms, or nations) at various times |
| Parameters | The numerical values that govern the strength of the relationships among variables in a model |
| Phillips curve | A curve that shows the short-run trade-off between inflation and unemployment |
| Private saving | The income that households have left after paying for taxes and consumption |
| Producer price index | A measure of the cost of a basket of goods and services sold by domestic firms |
| Public saving | The tax revenue that the government has left after paying for its spending |
| Purchasing-power parity | A theory of exchange rates that says a unit of any given currency should be able to buy the same quantity of goods in all countries |
| Quantity equation | The equation M × V = P × Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy’s output of goods and services |
| Quantity theory of money | A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate |
| Randomized controlled trial | An experiment in which a researcher randomly divides subjects into groups, treats the groups differently, and compares their outcomes |
| Rational Expectations | The theory that people optimally use all the information they have, including information about government policies, when forecasting the future |
| Real exchange rate | The rate at which a person can trade the goods and services of one country for the goods and services of another |
| Real GDP | The production of goods and services valued at constant prices |
| Real interest rate | The interest rate corrected for the effects of inflation |
| Real variables | Variables measured in physical units |
| Recession | A period of declining real incomes and rising unemployment |
| Reserve ratio | The fraction of deposits that banks hold as reserves |
| Reserve requirements | Regulations on the minimum amount of reserves that banks must hold against deposits |
| Reserves | Deposits that banks have received but have not loaned out |
| Reverse causality | A situation in which a researcher confuses the direction of influence between two variables |
| Sacrifice ratio | The number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point |
| Shoeleather cost | The resources wasted when inflation encourages people to reduce their money holdings |
| Stagflation | A period of falling output and rising prices |
| Standard error | A measure of the uncertainty associated with a parameter estimate that results from sampling variation |
| Statistical discrimination | Discrimination that arises because an irrelevant but observable personal characteristic is correlated with a relevant but unobservable attribute |
| Stock | A claim to partial ownership in a firm |
| Store of value | An item that people can use to transfer purchasing power from the present to the future |
| Strike | The organized withdrawal of labor from a firm by a union |
| Structural unemployment | unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one |
| Supply shock | an event that directly alters firms’ costs and prices, shifting the economy’s aggregate-supply curve and thus the Phillips curve |
| Tariff | A tax on goods produced abroad and sold domestically |
| Theory of liquidity preference | Keynes’s theory that the interest rate adjusts to bring money supply and money demand into balance |
| Time-series data | Data that presents information about a single subject (such as a person, firm, or nation) at various times |
| Trade balance | The value of a nation’s exports minus the value of its imports; also called net exports |
| Trade deficit | An excess of imports over exports |
| Trade policy | Government policy that directly influences the quantity of goods and services that a country imports or exports |
| Trade surplus | An excess of exports over imports |
| Unemployment insurance | A government program that partially protects the incomes of workers who become unemployed |
| Unemployment rate | The percentage of the labor force that is unemployed |
| Union | A worker association that bargains with employers over wages and working conditions |
| Unit of account | The yardstick people use to post prices and record debts |
| Velocity of money | The rate at which money changes hands |
| World price | The price of a good that prevails in the world market for that good |