Macroeconomics by Mankiw (7th edition)

Accommodating policy. A policy that yields to the effect of a shock and thereby prevents the shock from being disruptive; for example, a policy that raises aggregate demand in response to an adverse supply shock, sustaining the effect of the shock on prices and keeping output at its natural level.
Accounting proﬁt. The amount of revenue remaining for the owners of a ﬁrm after all the factors of production except capital have been compensated. (Cf. economic proﬁt, proﬁt.)
Acyclical. Moving in no consistent direction over the business cycle. (Cf. countercyclical, procyclical.)
Adaptive expectations. An approach that assumes that people form their expectation of a variable based on recently observed values of the variable. (Cf. rational expectations.)
Adverse selection. An unfavorable sorting of individuals by their own choices; for example, in efﬁciency-wage theory, when a wage cut induces good workers to quit and bad workers to remain with the ﬁrm.
Aggregate. Total for the whole economy.
Aggregate demand curve. The negative rela tionship between the price level and the aggregate quantity of output demanded that arises from the interaction between the goods market and the money market.
Aggregate-demand externality. The macroeconomic impact of one ﬁrm's price adjustment on the demand for all other ﬁrms' products.
Aggregate supply curve. The relationship between the price level and the aggregate quantity of output ﬁrms produce.
Animal spirits. Exogenous and perhaps selffulﬁlling waves of optimism and pessimism about the state of the economy that, according to some economists, inﬂuence the level of investment.
Appreciation. A rise in the value of a currency relative to other currencies in the market for foreign exchange. (Cf. depreciation.)
Arbitrage. The act of buying an item in one market and selling it at a higher price in another market in order to proﬁt from the price differential in the two markets.
Automatic stabilizer. A policy that reduces the amplitude of economic ﬂuctuations without regular and deliberate changes in economic policy; for example, an income tax system that automatically reduces taxes when income falls.
Average propensity to consume (APC). The ratio of consumption to income (C/Y).
Balance sheet. An accounting statement that shows assets and liabilities.
Balanced budget. A budget in which receipts equal expenditures.
Balanced growth. The condition under which many economic variables, such as income per person, capital per person, and the real wage, all grow at the same rate.
Balanced trade. A situation in which the value of imports equals the value of exports, so net exports equal zero.
Bank capital. The resources the bank owners have put into the institution.
Baumol–Tobin model. A model of money demand positing that people choose optimal money holdings by comparing the opportunity cost of the forgone interest from holding money and the beneﬁt of making less frequent trips to the bank.
Bond. A document representing an interest-bearing debt of the issuer, usually a corporation or the government.
Borrowing constraint. A restriction on the amount a person can borrow from ﬁnancial institutions, limiting that person's ability to spend his or her future income today; also called a liquidity constraint.
Budget constraint. The limit that income places on expenditure. (Cf. intertemporal budget constraint.)
Budget deficit. A shortfall of receipts from expenditure.
Budget surplus. An excess of receipts over expenditure.
Business cycle. Economy-wide ﬂuctuations in output, incomes, and employment.
Business fixed investment. Equipment and structures that businesses buy for use in future production.
Capital. 1. The stock of equipment and structures used in production. 2. The funds to finance the accumulation of equipment and structures.
Capital budgeting. An accounting procedure that measures both assets and liabilities.
Capital requirement. A minimum amount of bank capital mandated by regulators.
Central bank. The institution responsible for the conduct of monetary policy, such as the Federal Reserve in the United States. Classical dichotomy]]. The theoretical separation of real and nominal variables in the classical model, which implies that nominal variables do not influence real variables. (Cf. neutrality of money.)
Classical model. A model of the economy derived from the ideas of the classical, or pre-Keynesian, economists; a model based on the assumptions that wages and prices adjust to clear markets and that monetary policy does not inﬂuence real variables. (Cf. Keynesian model.)
Closed economy. An economy that does not engage in international trade. (Cf. open economy.)
Cobb–Douglas production function. A production function of the form F(K, L) � AK�L1��, where K is capital, L is labor, and A and � are parameters.
Commodity money. Money that is intrinsically useful and would be valued even if it did not serve as money. (Cf. ﬁat money, money.)
Competition. A situation in which there are many individuals or ﬁrms, so that the actions of any one of them do not inﬂuence market prices.
Conditional convergence. The tendency of economies with different initial levels of income, but similar economic policies and institutions, to become more similar in income over time.
Constant returns to scale. A property of a production function whereby a proportionate increase in all factors of production leads to an increase in output of the same proportion.
Consumer price index (CPI). A measure of the overall level of prices that shows the cost of a ﬁxed basket of consumer goods relative to the cost of the same basket in a base year.
Consumption. Goods and services purchased by consumers.
Consumption function. A relationship showing the determinants of consumption; for example, a relationship between consumption and disposable income, C � C(Y � T).
Contractionary policy. Policy that reduces aggregate demand, real income, and employment. (Cf. expansionary policy.)
Convergence. The tendency of economies with different initial levels of income to become more similar in income over time. Corporate income tax]]. The tax levied on the accounting proﬁt of corporations.
Cost of capital. The amount forgone by holding a unit of capital for one period, including interest, depreciation, and the gain or loss from the change in the price of capital.
Cost-push inflation. Inﬂation resulting from shocks to aggregate supply. (Cf. demand-pull inﬂation.)
Countercyclical. Moving in the opposite direction from output, incomes, and employment over the business cycle; rising during recessions and falling during recoveries. (Cf. acyclical, procyclical.)
CPI. See consumer price index.
Credit crunch. A change in conditions at ﬁnancial institutions that makes it hard for potential borrowers to obtain loans.
Crowding out. The reduction in investment that results when expansionary ﬁscal policy raises the interest rate.
Currency. The sum of outstanding paper money and coins.
Currency board. A ﬁxed exchange rate system under which a central bank backs all of the nation's currency with the currency of another country.
Cyclical unemployment. The unemployment associated with short-run economic ﬂuctuations; the deviation of the unemployment rate from the natural rate.
Cyclically adjusted budget deficit. The budget deﬁcit adjusted for the inﬂuence of the business cycle on government spending and tax revenue; the budget deﬁcit that would occur if the economy's production and employment were at their natural levels. Also called full-employment budget deﬁcit.
Debt-deflation. A theory according to which an unexpected fall in the price level redistributes real wealth from debtors to creditors and, therefore, reduces total spending in the economy.
Deflation. A decrease in the overall level of prices. (Cf. disinﬂation, inﬂation.)
Deflator. See GDP deﬂator.
Demand deposits. Assets that are held in banks and can be used on demand to make transactions, such as checking accounts.
Demand-pull inflation. Inﬂation resulting from shocks to aggregate demand. (Cf. cost-push inﬂation.)
Demand shocks. Exogenous events that shift the aggregate demand curve.
Depreciation. 1. The reduction in the capital stock that occurs over time because of aging and use. 2. A fall in the value of a currency relative to other currencies in the market for foreign exchange. (Cf. appreciation.)
Depression. A very severe recession.
Devaluation. An action by the central bank to decrease the value of a currency under a system of ﬁxed exchange rates. (Cf. revaluation.)
Diminishing marginal product. A characteristic of a production function whereby the marginal product of a factor falls as the amount of the factor increases while all other factors are held constant.
Discount rate. The interest rate that the Fed charges when it makes loans to banks.
Discounting. The reduction in value of future expenditure and receipts, compared to current expenditure and receipts, resulting from the presence of a positive interest rate.
Discouraged workers. Individuals who have left the labor force because they believe that there is little hope of ﬁnding a job.
Disinflation. A reduction in the rate at which prices are rising. (Cf. deﬂation, inﬂation.)
Disposable income. Income remaining after the payment of taxes.
Dollarization. The adoption of the U.S. dollar as the currency in another country.
Dominated asset. An asset that offers an inferior return compared to another asset in all possible realizations of future uncertainty. Double coincidence of wants]]. A situation in which two individuals each have precisely the good that the other wants.
Economic profit. The amount of revenue remaining for the owners of a firm after all the factors of production have been compensated. (Cf. accounting profit, profit.)
Efficiency of labor. A variable in the Solow growth model that measures the health, education, skills, and knowledge of the labor force.
Efficiency units of labor. A measure of the labor force that incorporates both the number of workers and the efﬁciency of each worker.
Efficiency-wage theories. Theories of real-wage rigidity and unemployment according to which ﬁrms raise labor productivity and proﬁts by keeping real wages above the equilibrium level.
Efficient markets hypothesis. The theory that asset prices reﬂect all publicly available information about the value of an asset. Elasticity]]. The percentage change in a variable caused by a 1-percent change in another variable. Endogenous growth theory]]. Models of economic growth that try to explain the rate of technological change.
Endogenous variable. A variable that is explained by a particular model; a variable whose value is determined by the model's solution. (Cf. exogenous variable.)
Equilibrium. A state of balance between opposing forces, such as the balance of supply and demand in a market.
Euler's theorem. The mathematical result economists use to show that economic proﬁt must be zero if the production function has constant r eturns to scale and if factors are paid their marginal products.
Ex ante real interest rate. The real interest rate anticipated when a loan is made; the nominal interest rate minus expected inﬂation. (Cf. ex post real interest rate.)
Ex post real interest rate. The real interest rate actually realized; the nominal interest rate minus actual inﬂation. (Cf. ex ante real interest rate.)
Excess reserves. Reserves held by banks above the amount mandated by reserve requirements.
Exchange rate. The rate at which a country makes exchanges in world markets. (Cf. nominal exchange rate, real exchange rate.)
Exogenous variable. A variable that a particular model takes as given; a variable whose value is independent of the model's solution. (Cf. endogenous variable.)
Expansionary policy. Policy that raises aggregate demand, real income, and employment. (Cf. contractionary policy.)
Exports. Goods and services sold to other countries.
Factor of production. An input used to produce goods and services; for example, capital or labor.
Factor price. The amount paid for one unit of a factor of production.
Factor share. The proportion of total income being paid to a factor of production.
Federal funds rate. The overnight interest rate at which banks lend to one another.
Federal Reserve (the Fed). The central bank of the United States.
Fiat money. Money that is not intrinsically useful and is valued only because it is used as money. (Cf. commodity money, money.)
Financial intermediation. The process by which resources are allocated from those individuals who wish to save some of their income for future consumption to those individuals and ﬁrms who wish to borrow to buy investment goods for future production.
Financing constraint. A limit on the quantity of funds a ﬁrm can raise—such as through borrowing— in order to buy capital.
Fiscal policy. The government's choice regarding levels of spending and taxation.
Fisher effect. The one-for-one inﬂuence of expected inﬂation on the nominal interest rate.
Fisher equation. The equation stating that the nominal interest rate is the sum of the real interest rate and expected inﬂation (i � r � E).
Fixed exchange rate. An exchange rate that is set by the central bank's willingness to buy and sell the domestic currency for foreign currencies at a predetermined price. (Cf. ﬂoating exchange rate.)
Flexible prices. Prices that adjust quickly to equil ibrate supply and demand. (Cf. sticky prices.)
Floating exchange rate. An exchange rate that the central bank allows to change in response to changing economic conditions and economic policies. (Cf. ﬁxed exchange rate.) Flow]]. A variable measured as a quantity per unit of time. (Cf. stock.)
Fractional-reserve banking. A system in which banks keep only some of their deposits on reserve. (Cf. 100-percent-reserve banking.)
Frictional unemployment. The unemployment that results because it takes time for workers to search for the jobs that best suit their skills and tastes. (Cf. structural unemployment.) Full-employment budget deficit]]. See cyclically adjusted budget deﬁcit.
GDP. See gross domestic product.
GDP deflator. The ratio of nominal GDP to real GDP; a measure of the overall level of prices that shows the cost of the currently produced basket of goods relative to the cost of that basket in a base year.
General equilibrium. The simultaneous equilibrium of all the markets in the economy.
GNP. See gross national product. Gold standard]]. A monetary system in which gold serves as money or in which all money is convertible into gold at a ﬁxed rate. Golden rule]]. The saving rate in the Solow growth model that leads to the steady state in which consumption per worker (or consumption per efﬁciency unit of labor) is maximized. Government purchases]]. Goods and services bought by the government. (Cf. transfer payments.) Government-purchases multiplier]]. The change in aggregate income resulting from a one-dollar change in government purchases.
Gross domestic product (GDP). The total income earned domestically, including the income earned by foreign-owned factors of production; the total expenditure on domestically produced goods and services.
Gross national product (GNP). The total income of all residents of a nation, including the income from factors of production used abroad; the total expenditure on the nation's output of goods and services.
High-powered money. The sum of currency and bank reserves; also called the monetary base.
Human capital. The accumulation of investments in people, such as education.
Hyperinflation. Extremely high inﬂation.
Hysteresis. The long-lasting inﬂuence of history, such as on the natural rate of unemployment.
Imperfect-information model. The model of aggregate supply emphasizing that individuals do not always know the overall price level because they cannot observe the prices of all goods and services in the economy. Import quota]]. A legal limit on the amount of a good that can be imported.
Imports. Goods and services bought from other countries. Imputed value]]. An estimate of the value of a good or service that is not sold in the marketplace and therefore does not have a market price.
Income effect. The change in consumption of a good resulting from a movement to a higher or lower indifference curve, holding the relative price constant. (Cf. substitution effect.)
Index of leading indicators. See leading indicators. Indifference curves]]. A graphical representation of preferences that shows different combinations of goods producing the same level of satisfaction. Inflation]]. An increase in the overall level of prices. (Cf. deﬂation, disinﬂation.) Inflation targeting]]. A monetary policy under which the central bank announces a speciﬁc target, or target range, for the inﬂation rate. Inflation tax]]. The revenue raised by the government through the creation of money; also called seigniorage. Inside lag]]. The time between a shock hitting the economy and the policy action taken to respond to the shock. (Cf. outside lag.) Insiders]]. Workers who are already employed and therefore have an inﬂuence on wage bargaining. (Cf. outsiders.) Interest rate]]. The market price at which resources are transferred between the present and the future; the return to saving and the cost of borrowing.
Intermediation. See ﬁnancial intermediation.
Intertemporal budget constraint. The budget constraint applying to expenditure and income in more than one period of time. (Cf. budget constraint.) Inventory investment]]. The change in the quantity of goods that ﬁrms hold in storage, including materials and supplies, work in process, and ﬁnished goods. Investment]]. Goods purchased by individuals and ﬁrms to add to their stock of capital. Investment tax credit]]. A provision of the corporate income tax that reduces a ﬁrm's tax when it buys new capital goods. IS curve]]. The negative relationship between the interest rate and the level of income that arises in the market for goods and services. (Cf. IS–LM model, LM curve.)
IS–LM model. A model of aggregate demand that shows what determines aggregate income for a given price level by analyzing the interaction between the goods market and the money market. (Cf. IS curve, LM curve.)
Keynesian cross. A simple model of income determination, based on the ideas in Keynes's General Theory, which shows how changes in spending can have a multiplied effect on aggregate income.
Keynesian model. A model derived from the ideas of Keynes's General Theory; a model based on the assumptions that wages and prices do not adjust to clear markets and that aggregate demand determines the economy's output and employment. (Cf. classical model.)
Labor-augmenting technological progress. Advances in productive capability that raise the efficiency of labor.
Labor force. Those in the population who have a job or are looking for a job.
Labor-force participation rate. The percentage of the adult population in the labor force.
Labor hoarding. The phenomenon of ﬁrms employing workers whom they do not need when the demand for their products is low, so that they will still have these workers when demand recovers.
Large open economy. An open economy that can inﬂuence its domestic interest rate; an economy that, by virtue of its size, can have a substantial impact on world markets and, in particular, on the world interest rate. (Cf. small open economy.)
Laspeyres price index. A measure of the level of prices based on a ﬁxed basket of goods. (Cf. Paasche price index.) Leading indicators]]. Economic variables that ﬂuctuate in advance of the economy's output and thus signal the direction of economic ﬂuctuations. Leverage]]. The use of borrowed money to supplement existing funds for purposes of investment. Life-cycle hypothesis]]. The theory of consumption that emphasizes the role of saving and borrowing as transferring resources from those times in life when income is high to those times in life when income is low, such as from working years to retirement.
Liquid. Readily convertible into the medium of exchange; easily used to make transactions.
Liquidity constraint. A restriction on the amount a person can borrow from a ﬁnancial institution, which limits the person's ability to spend his future income today; also called a borrowing constraint. Liquidity-preference theory]]. A simple model of the interest rate, based on the ideas in Keynes's General Theory, which says that the interest rate adjusts to equilibrate the supply and demand for real money balances.
LM curve. The positive relationship between the interest rate and the level of income (while holding the price level ﬁxed) that arises in the market for real money balances. (Cf. IS–LM model, IS curve.) Loanable funds]]. The ﬂow of resources available to ﬁnance capital accumulation. Lucas critique]]. The argument that traditional policy analysis does not adequately take into account the impact of policy changes on people's expectations.
M1, M2, M3. Various measures of the stock of money, where larger numbers signify a broader definition of money.
Macroeconometric model. A model that uses data and statistical techniques to describe the economy quantitatively, rather than just qualitatively.
Macroeconomics. The study of the economy as a whole. (Cf. microeconomics.)
Marginal product of capital (MPK). The amount of extra output produced when the capital input is increased by one unit. *Marginal product of labor (MPL). The amount of extra output produced when the labor input is increased by one unit. *Marginal propensity to consume (MPC). The increase in consumption resulting from a one-dollar increase in disposable income.
Marginal rate of substitution (MRS). The rate at which a consumer is willing to give up some of one good in exchange for more of another; the slope of the indifference curve. Market-clearing model]]. A model that assumes that prices freely adjust to equilibrate supply and demand. Medium of exchange]]. The item widely accepted in transactions for goods and services; one of the functions of money. (Cf. store of value, unit of account.)
Menu cost. The cost of changing a price.
Microeconomics. The study of individual markets and decisionmakers. (Cf. macroeconomics.)
Model. A simpliﬁed representation of reality, often using diagrams or equations, that shows how variables interact.
Monetarism. The doctrine according to which changes in the money supply are the primary cause of economic ﬂuctuations, implying that a stable money supply would lead to a stable economy.
Monetary base. The sum of currency and bank reserves; also called high-powered money.
Monetary neutrality. See neutrality of money.
Monetary policy. The central bank's choice regarding the supply of money.
Monetary transmission mechanism. The process by which changes in the money supply inﬂuence the amount that households and ﬁrms wish to spend on goods and services. Monetary union]]. A group of economies that have decided to share a common currency and thus a common monetary policy. Money]]. The stock of assets used for transactions. (Cf. commodity money, ﬁat money.) Money demand function]]. A function showing the determinants of the demand for real money balances; for example, (M/P)d � L(i,Y). Money multiplier]]. The increase in the money supply resulting from a one-dollar increase in the monetary base.
Moral hazard. The possibility of dishonest behavior in situations in which behavior is imperfectly monitored; for example, in efﬁciency-wage theory, the possibility that low-wage workers may shirk their responsibilities and risk getting caught and ﬁred.
Multiplier. See government-purchases multiplier, money multiplier, or tax multiplier.
Mundell–Fleming model. The IS–LM model for a small open economy.
Mundell–Tobin effect. The fall in the real interest rate that results when an increase in expected inﬂation raises the nominal interest rate, lowers real money balances and real wealth, and thereby reduces consumption and raises saving.
NAIRU. Non-accelerating inflation rate of unemployment.
National income accounting. The accounting system that measures GDP and many other related statistics.
National income accounts identity. The equation showing that GDP is the sum of consumption, investment, government purchases, and net exports. National saving]]. A nation's income minus consumption and government purchases; the sum of private and public saving. Natural rate of unemployment]]. The steady-state rate of unemployment; the rate of unemployment toward which the economy gravitates in the long run.
Natural-rate hypothesis. The premise that ﬂuctuations in aggregate demand inﬂuence output, employment, and unemployment only in the short run, and that in the long run these variables return to the levels implied by the classical model.
Near money. Assets that are almost as useful as money for engaging in transactions and, therefore, are close substitutes for money. Neoclassical model of investment]]. The theory according to which investment depends on the deviation of the marginal product of capital from the cost of capital. Net capital outflow]]. The net ﬂow of funds being invested abroad; domestic saving minus domestic investment; also called net foreign investment. Net exports]]. Exports minus imports. Net foreign investment]]. See net capital outﬂow. Net investment]]. The amount of investment after the replacement of depreciated capital; the change in the capital stock. Neutrality of money]]. The property that a change in the money supply does not inﬂuence real variables. (Cf. classical dichotomy.)
New Keynesian economics. The school of thought according to which economic ﬂuctuations can be explained only by admitting a role for some microeconomic imperfection, such as sticky wages or prices. Nominal]]. Measured in current dollars; not adjusted for inﬂation. (Cf. real.) Nominal exchange rate]]. The rate at which one country's currency trades for another country's currency. (Cf. exchange rate, real exchange rate.) Nominal interest rate]]. The return to saving and the cost of borrowing without adjustment for inﬂation. (Cf. real interest rate.) Normal good]]. A good that a consumer demands in greater quantity when his or her income rises.
Okun's law. The negative relationship between unemployment and real GDP, according to which a decrease in unemployment of 1 percentage point is associated with additional growth in real GDP of approximately 2 percent. 100-percent-reserve banking]]. A system in which banks keep all deposits on reserve. (Cf. fractionalreserve banking.)
Open economy. An economy in which people can freely engage in international trade in goods and capital. (Cf. closed economy.)
Open-market operations. The purchase or sale of government bonds by the central bank for the purpose of increasing or decreasing the money supply. Optimize]]. To achieve the best possible outcome subject to a set of constraints. Outside lag]]. The time between a policy action and its inﬂuence on the economy. (Cf. inside lag.) Outsiders]]. Workers who are not employed and therefore have no inﬂuence on wage bargaining. (Cf. insiders.)
Paasche price index. A measure of the level of prices based on a changing basket of goods. (Cf. Laspeyres price index.)
Permanent income. Income that people expect to persist into the future; normal income. (Cf. transitory income.)
Permanent-income hypothesis. The theory of consumption according to which people choose consumption based on their permanent income, and use saving and borrowing to smooth consumption in response to transitory variations in income.
Phillips curve. A negative relationship between inﬂation and unemployment; in its modern form, a relationship among inﬂation, cyclical unemployment, expected inﬂation, and supply shocks, derived from the short-run aggregate supply curve.
Pigou effect. The increase in consumer spending that results when a fall in the price level raises real money balances and, thereby, consumers' wealth. Political business cycle]]. The ﬂuctuations in output and employment resulting from the manipulation of the economy for electoral gain.
Portfolio theories of money demand. Theories that explain how much money people choose to hold and that stress the role of money as a store of value. (Cf. transactions theories of money demand.)
Precautionary saving. The extra saving that results from uncertainty regarding, for example, longevity or future income.
Predetermined variable. A variable whose value was ﬁxed in a previous period of time.
Present value. The amount today that is equivalent to an amount to be received in the future, taking into account the interest that could be earned over the interval of time. Private saving]]. Disposable income minus consumption.
Procyclical. Moving in the same direction as output, incomes, and employment over the business cycle; falling during recessions and rising during recoveries. (Cf. acyclical, countercyclical.) Production function]]. The mathematical relationship showing how the quantities of the factors of production determine the quantity of goods and services produced; for example, Y � F(K,L). Production smoothing]]. The motive for holding inventories according to which a ﬁrm can reduce its costs by keeping the amount of output it produces steady and allowing its stock of inventories to respond to ﬂuctuating sales.
Profit. The income of ﬁrm owners; ﬁrm revenue minus ﬁrm costs. (Cf. accounting proﬁt, economic proﬁt.)
Public saving. Government receipts minus government spending; the budget surplus.
Purchasing-power parity. The doctrine according to which goods must sell for the same price in every country, implying that the nominal exchange rate reﬂects differences in price levels.
q theory of investment. The theory according to which expenditure on capital goods depends on the ratio of the market value of installed capital to its replacement cost. Quantity equation]]. The identity stating that the product of the money supply and the velocity of money equals nominal expenditure (MV � PY); coupled with the assumption of stable velocity, an explanation of nominal expenditure called the quantity theory of money. Quantity theory of money]]. The doctrine emphasizing that changes in the quantity of money lead to changes in nominal expenditure. Quota]]. See import quota.
Random variable. A variable whose value is determined by chance.
Random walk. The path followed by a variable whose changes over time are unpredictable.
Rational expectations. An approach that assumes that people optimally use all available information— including information about current and prospective policies—to forecast the future. (Cf. adaptive expectations.)
Real. Measured in constant dollars; adjusted for inﬂation. (Cf. nominal.)
Real business cycle theory. The theory according to which economic ﬂuctuations can be explained by real changes in the economy (such as changes in technology) and without any role for nominal variables (such as the money supply).
Real exchange rate. The rate at which one country's goods trade for another country's goods. (Cf. exchange rate, nominal exchange rate.) Real interest rate]]. The return to saving and the cost of borrowing after adjustment for inﬂation. (Cf. nominal interest rate.) Real money balances]]. The quantity of money expressed in terms of the quantity of goods and services it can buy; the quantity of money divided by the price level (M/P). Recession]]. A sustained period of falling real income.
Rental price of capital. The amount paid to rent one unit of capital.
Reserve requirements. Regulations imposed on banks by the central bank that specify a minimum reserve–deposit ratio.
Reserves. The money that banks have received from depositors but have not used to make loans.
Residential investment. New housing bought by people to live in and by landlords to rent out.
Revaluation. An action undertaken by the central bank to raise the value of a currency under a system of ﬁxed exchange rates. (Cf. devaluation.)
Ricardian equivalence. The theory according to which forward-looking consumers fully anticipate the future taxes implied by government debt, so that government borrowing today coupled with a tax increase in the future to repay the debt has the same effect on the economy as a tax increase today.
Sacrifice ratio. The number of percentage points of a year's real GDP that must be forgone to reduce inflation by 1 percentage point.
Saving. See national saving, private saving, and public saving.
Seasonal adjustment. The removal of the regular ﬂuctuations in an economic variable that occur as a function of the time of year.
Sectoral shift. A change in the composition of demand among industries or regions.
Seigniorage. The revenue raised by the government through the creation of money; also called the inﬂation tax.
Shock. An exogenous change in an economic relationship, such as the aggregate demand or aggregate supply curve.
Shoeleather cost. The cost of inﬂation from reducing real money balances, such as the inconvenience of needing to make more frequent trips to the bank. Small open economy]]. An open economy that takes its interest rate as given by world ﬁnancial markets; an economy that, by virtue of its size, has a negligible impact on world markets and, in particular, on the world interest rate. (Cf. large open economy.)
Solow growth model. A model showing how saving, population growth, and technological progress determine the level of and growth in the standard of living.
Solow residual. The growth in total factor productivity, measured as the percentage change in output minus the percentage change in inputs, where the inputs are weighted by their factor shares. (Cf. total factor productivity.)
Speculative attack. The massive selling of a country's currency, often because of a change in investors' perceptions, that renders a ﬁxed-exchange rate untenable. Stabilization policy]]. Public policy aimed at reducing the severity of short-run economic ﬂuctuations.
Stagflation. A situation of falling output and rising prices; combination of stagnation and inﬂation.
Steady state. A condition in which key variables are not changing.
Sticky prices. Prices that adjust sluggishly and, therefore, do not always equilibrate supply and demand. (Cf. ﬂexible prices.)
Sticky-price model. The model of aggregate supply emphasizing the slow adjustment of the prices of goods and services.
Stock. 1. A variable measured as a quantity at a point in time. (Cf. ﬂow.) 2. Shares of ownership in a corporation.
Stock market. A market in which shares of ownership in corporations are bought and sold.
Stock-out avoidance. The motive for holding inventories according to which ﬁrms keep extra goods on hand to prevent running out if sales are unexpectedly high. Store of value]]. A way of transferring purchasing power from the present to the future; one of the functions of money. (Cf. medium of exchange, unit of account.)
Structural unemployment. The unemployment resulting from wage rigidity and job rationing. (Cf. frictional unemployment.)
Sub-prime borrower. A borrower with lower income and assets and thus higher risk of default.
Substitution effect. The change in consumption of a good resulting from a movement along an indifference curve because of a change in the relative price. (Cf. income effect.) Supply shocks]]. Exogenous events that shift the aggregate supply curve.
Tariff. A tax on imported goods.
Tax multiplier. The change in aggregate income resulting from a one-dollar change in taxes. Taylor principle]]. The proposition that a central bank should respond to an increase in inflation with an even greater increase in the nominal interest rate. Taylor rule]]. A rule for monetary policy according to which the central bank sets the interest rate as a function of inﬂation and the deviation of output from its natural level. Time inconsistency]]. The tendency of policymakers to announce policies in advance in order to influence the expectations of private decisionmakers, and then to follow different policies after those expectations have been formed and acted upon.
Tobin's q. The ratio of the market value of installed capital to its replacement cost.
Total factor productivity. A measure of the level of technology; the amount of output per unit of input, where different inputs are combined on the basis of their factor shares. (Cf. Solow residual.) Trade balance]]. The receipts from exports minus the payments for imports. Transactions theories of money demand]]. Theories that explain how much money people choose to hold and that stress the role of money as a medium of exchange. (Cf. portfolio theories of money demand.)
Transfer payments. Payments from the government to individuals that are not in exchange for goods and services, such as Social Security payments. (Cf. government purchases.)
Transitory income. Income that people do not expect to persist into the future; current income minus normal income. (Cf. permanent income.)
Underground economy. Economic transactions that are hidden in order to evade taxes or conceal illegal activity.
Unemployment insurance. A government program under which unemployed workers can collect beneﬁts for a certain period of time after losing their jobs. Unemployment rate]]. The percentage of those in the labor force who do not have jobs. Unit of account]]. The measure in which prices and other accounting records are recorded; one of the functions of money. (Cf. medium of exchange, store of value.)
Utility. A measure of household satisfaction.
Value added. The value of a firm's output minus the value of the intermediate goods the firm purchased.
Velocity of money. The ratio of nominal expenditure to the money supply; the rate at which money changes hands.
Wage. The amount paid for one unit of labor.
Wage rigidity. The failure of wages to adjust to equilibrate labor supply and labor demand.
Work in process. Goods in inventory that are in the process of being completed.
Worker-misperception model. The model of aggregate supply emphasizing that workers sometimes perceive incorrectly the overall level of prices.
World interest rate. The interest rate prevailing in world ﬁnancial markets.

Macroeconomics by Mankiw (7th edition)

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