A Glossary of Macroeconomic Terms

A Glossary of Macroeconomic Terms 07/09/2022, 10:24 AM
A Glossary of Macroeconomics Terms

© 1999-2020, Douglas A.Ruby (06-29-2020)
1. The Accelerator -- A parameter that defines the relationship between

national income and required capital stock.
2. Adaptive Expectations -- Inflationary expectations based on a
weighted average of past actual inflation and past expectations of the
rate of inflation.
3. Aggregate Demand -- A relationship between Real GDP and the
Price level summarizing the four expenditure categories:
Consumption, Investment, Government, and Net Exports.
4. Aggregate Expenditure -- The sum of the four expenditure
categories: Consumption, Investment, Government, and Net Exports.
5. Aggregate Output -- The total output of an economy based on
production technologies and available factor inputs.
6. Aggregate Production -- The total output of an economy based on
production technologies and available factor inputs.
7. Aggregate Supply -- A relationship between Real GDP (ouptut) and the Price level based on
production relationships.
8. An Asset -- Anything of value owned by an individual, institution or economic agent.
9. Autonomous Expenditure -- Expenditure that takes place independent of national income.
10. Autonomous Shock -- An external change to spending independent of changes in real GDP /
aggregate Income.
11. Average Propensity fo Consume -- The ratio between aggregate consumption expenditure and
aggregate income.
12. Average Propensity fo Save -- The ratio between aggregate savings and aggregate income.
13. Balance of Payments -- An account of all transactions (current, capital, balance) among trading
nations.
14. Board of Governors -- Seven individuals (appointed by the President, confirmed by Congress) to
head the Federal Reserve System.
15. a Bond -- A long term (10+ years) debt instrument.
16. Branch District Banks -- 25 regional banks of the Federal Reserve System align to the 12 district
banks.
17. Budget Deficits -- A flow variable summarizing the difference between government expenditure
over taxes collected.
18. Business Cycle -- An economic contraction (recession) followed by an expansion.
19. Business Inventories -- Additions or deletions to existing inventory levels in response to economic
conditions (a flow variable).
20. Capital Account -- A component of the Balance of Payments summarizing domestic investment
abroad and foreign invesment domestically.
21. Capital Accumulation -- Growth in the capital stock available to aggregate production made
possible through new investement expenditure.
22. Capital Gain -- A positive difference between the sale price of an asset and its purchase price.
23. Capital Intensive Production -- Production technology that relies on relatively more capital relative
to other factors of production.
24. Capital Loss -- A negative difference between the sale price of an asset and its purchase price.
25. Capital Markets -- Direct Financial Markets facilitating the trading of equities and long-term debt
instruments.
26. Capital Outflows (outflow of capital) -- The excess of domestic investment abroad over foreign
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investment domestically.
27. Capital Stock -- The amount of capital used to support aggregate production in an economy.
28. Capital-Labor Ratio -- The amount of capital avialable per worker in the production of goods and
services.
29. Cobb-Douglas Production function -- A multiplicative expression relating the conversion of factors
inputs into output. Exponents represent output elasticities.
30. Commercial Banks -- Nationally or state chartered institutions legally allowed to accept deposits
from and make loans to the non-bank public.
31. Commercial Paper -- Short-term debt instruments often used by businesses to finance seasonal
inventory needs.
32. Common Stock -- Equity (ownership) shares in publically held corporations offered for sale and
traded by various economic agents. A share is a claim on predent and future earnings of the
corporation.
33. Compensation Approach -- A method of national income accounting aggregating over various
sources of income-earned.
34. Competition -- Interactions among sellers to attract buyers for their products, services or factor
inputs or buyers for those products, services or factor inputs.
35. Constant Returns to Scale (CRS) -- A long run production concept where a doubling of all factor
inputs exactly doubles the amount of output.
36. Consumer Price Index (CPI) -- A weighted average of the prices of a representative market basket
of goods and services that represents consumption patterns in some base time period.
37. Consumers (Households) -- An economic agent who desires to purchase goods and services with
the goal of maximizing the satisfaction (utility) from consumption of those goods and services.
38. Consumption Expenditure -- Aggregate spending by private-sector agents on durable goods, non-
durables and services.
39. Consumption function -- A mathematical or functional relationship relating key independent
variables to consumption expenditure.
40. Contraction -- A decline on overall economic (business) activity. The transition from a business
cycle peak to trough.
41. Contractionary Fiscal Policy -- Increases in taxes or decreases in government spending with the
goal of slowing the rate of economic growth.
42. Contractionary Monetary Policy -- A decrease in the money supply coupled with increases in the
structure of interest rates with the goal of slowing the rate of economic growth.
43. Contractionary Policy -- Macroeconomic policy designed to slow the rate of economic growth.
44. Coupon -- The periodic interest payment from a long-term bond.
45. Credit Risk -- The probability of a borrower defaulting on a loan or inability to service that loan.
46. Cross-sectional data -- Economic data collected at a point in time on different economic agents or
measures.
47. Crowding Out -- The impact of increased government deficit spending resulting in higher interest
rates leading to less investment spending in an economy..
48. Currency -- Cash and coin used to facilitate transactions to to satisfy debt obligations. Also known
as Legal Tender.
49. Currency-Demand Deposit Ratio -- the quantity of currency in circulation divided by the sum of all
demand deposits within the commercial banking system.
50. Current Account -- A component of the Balance of Payments summarizing merchandise and service
flows among trading nations.
51. Current Yield -- A simple ratio between the periodic payment of a financial asset and the price of
that asset.
52. Cyclical Unemployment -- Changes in unemployment attributed to cyclical behavior in economic
activity.
53. Debt-Nominal GDP Ratio -- Total Government (Federal) debt outstanding divided by Nominal
GDP.
54. Decreasing Returns to Scale -- A long-term production relationship such that a doubling of inputs
leads to a less-than doubling of output.
55. Deflation -- A decline in the aggregate price level over some defined time period.
56. Deflation (deflationary pressure) -- Factors in an economy that put downward pressure on the
overall price level.
57. Deflationary Gap -- The difference between the current level of aggregate output below the full-
employment level of output.
58. Demand -- A relationship between market price and quantities of goods and services purchased in a
given period of time.
59. Demand Deposits -- Checking account balances held with a commercial bank such that these funds
may be withdrawn at any time.
60. Demand for Loanable Funds -- A relationship between real interest rates and aggregate borrowing
used to support investment expenditure.
61. Demand for Money (Money Demand) -- A relationship between nominal interest rates and the
desire by the non-bank public to hold cash balances.
62. Demand-side Policy -- Economic policy that affects aggregate spending or the ability to spend.
63. Demand-side Shock -- An exogenous event that affects aggregate spending or the ability to spend.
64. Depreciation -- A measure of the wear and tear that affects capital equipment or other intermediate
goods.
65. Desired Capital Stock -- The optimal level of plant and machinery based on the contribution to the
firm's revenue and cost of acquisition.
66. Desired Real Rate of Return -- The level of a core interest rate sufficient to cause and economic
agent to lend.
67. Diminishing Marginal Productivity (DMP) -- A short run production concept where increases in the
variable factor of production lead to less and less additional output.
68. Diminishing Marginal Utility -- The concept that additional units consumed of a particular
commodity provide less and less additional satisfaction relative to previous units consumed.
69. Direct Finance -- The transfer of loanable funds through the use of capital markets (i.e. the Stock
and Bond markets) usually facilitated by investment banks.
70. Discount -- An outcome where the selling price of a financial asset is less than the face value of that
assed.
71. Discount Rate -- A policy tool of the Federal Reserve in the form of an interest rate charge for loans
to member banks.
72. Disinflation -- A decline in the overall rate of inflation. Prices are still rising but by a smaller
amount relative to previous time periods.
73. Disintermediation -- The removal of funds from a financial intermediary (a bank or other depository
institution).
74. Disposable Personal Income -- Personal Income less taxes paid.
75. District Banks -- Twelve Regional Banks of the Federal Reserve System owned by their member
commercial banks.
76. Diversification -- A bundle of assets in a portfolio chosen to minimize financial risk and provide an
acceptable level of return.
77. Dividend -- A periodic payment made to share-holders based on the earnings of a publically-held
corporation.
78. Durable Goods -- Goods that deliver consumption services over an extended period of time.
79. Economic Bad -- A product not desired by economic agents (pollution, risk).
80. Economic Expansion -- Growth in Real GDP for one fiscal quarter or more.
81. Economic Good -- A product desired by economic agents.
82. Economic Growth -- A positive change in the level of aggregate output or Real GDP.
83. Economic Information -- Metrics (growth, inflation, employment, interest rates) about the health of
the aggregate economy.
84. Economics -- The study of how a given society allocates scarce resources to meet (or satisfy) the
unlimited wants and need of its members.
85. Employment -- A measure of those individuals in the labor force working, at least one hour per
week, for pay.
86. Endowment (point) -- A bundle of goods or services, available for trade, in possession of an
economic agent.
87. Equilibrium -- A situation where there is no tendency for change.
88. Essential Factors of Production -- An input that is necessary for producing any positive level of
output.
89. Exchange Rate -- The value of a domestic currency expressed in terms of a foreign currency or
basket of foreign currencies.
90. Ex-post Real Interest Rate -- The difference between a nominal interest rate and the observed rate
of inflaiton.
91. Excess Demand for Goods -- A desired level of aggregate spending over and above the level of
potential output at a given price level.
92. Excess Demand for Money -- A desire for holding cash balances over and above the available
money stock at a given nominal interest rate.
93. Excess Reserves -- Reserves held by a commercial bank over and above the required level
established by the central bank.
94. Excess Supply of Goods -- A level of potential output over and above the level of aggregate
spending at a give price level.
95. Excess Supply of Money -- A level of money stock over and above the non-bank public's desire to
hold cash balances at a given nominal interest rate.
96. Exchange -- The trading of goods and services among economic agents.
97. Expansion -- Growth in aggregate output (Real GDP). The transition from trough to peak in a
business cycle.
98. Expansionary Fiscal Policy -- An increase in govenrnment spending and/or a reduction in taxes
with the goal of stimulating economic growth.
99. Expansionary Monetary Policy -- An increase in the money supply with the goal of lower interest
rates to stimulate investment spending and economic growth.
100. Expansionary Policy -- Government actions either by the legislative or executive branches or
central bank to stimulate economic growth.
101. Expectations Hypothesis -- A hypothesis about the term-structure of interest rates based current
interest rates and forecasts of future rates.
102. Expected Inflation -- The anticipated level of future inflation used in the determination of current
nominal interest rates, prices, wages and spending plans.
103. Expected Price -- The anticipated level of the future price level.
104. Expected Rate of Growth -- The anticipated rate of change in aggregate output (Real GDP)..
105. Expected Rate of Inflation -- The anticipated level of future inflation used in the determination of
current nominal interest rates, prices, wages and spending plans.
106. Expected Return -- The anticipated future periodic payment from a given financial asset.
107. Expected Total Rate of Return -- The anticipated future periodic payment plus capital gain or loss
divided by the purchase price of a financial asset.
108. Expenditure Approach -- A method of national income accounting to measure spending based on
key expenditure categories.
109. Exports -- The sale of domestically produced goods and services to foreign buyers.
110. Face Value -- The actual printed or contractual price of a debt instrument.
111. Factors of Production -- Broad categories of inputs required for any type of production.
112. Factors of Production (Land, Labor, Capital, Entrepreneurship) -- Broad categories of inputs
required for any type of production.
113. Federal Budget -- Spending obligations legally established by Federal Government.
114. Federal Debt -- The total level of borrowing by the Federal Government.
115. Federal Funds Target -- An interest rate target established by the Federal Reserve used to reflect the
liquidity of the commercial banking sector.
116. Federal Open Market Committee -- A group within the Federal Reserve System made up of the
Board of Governors and four rotating District bank presidents responsible for the execution of
monetary policy.
117. Federal Reserve System -- The decentralized, quasi-public/quasi-private central bank of the United
States responsible for monetary policy and overseeing the health of the banking system.
118. Final Goods and Services -- Goods and services that are purchased for direct consumption.
119. Financial Innovation -- The creation of new financial assets designed to manage risk or facilitate
hedging activities by financial institutions and business firms.
120. Financial Instruments -- Stocks, bonds, short-term lending agreements used to facilitate borrowing,
lending and trading withing the financial system.
121. Financial Intermediaries -- Banks that are legally permitted to accept deposits and make loans to
households and businesses.
122. Financial Intermediation -- A form of indirect finance where an institution (a bank) acts as an
intermediary to reduce transactions costs and facilitate borrowing and lending.
123. Financial Markets -- Institutions that facilitate the issuance and purchase of new financial assets and
the trading of existing financial assets.
124. Financial Risk -- The probability that a financial asset will lose value such that the sale price will be
less than the purchase price.
125. Fiscal Policy -- Changes in taxes collected or spending by the Federal Government in the goal of
affecting aggregate economic activity.
126. Fixed Exchange Rates -- A system where the value of all global currencies are tied to a unit of a
physical commodity loke gold.
127. Fixed Nonresidential Investment -- Additions to the existing stock of plant and equipment used in
the production of goods and services.
128. Fixed Residential Investment -- Additions to the existing stock of housing used to provide housing
services.
129. Flexible Exchange Rates -- A system where the value of global currencies are established by the
forces of supply and demand reflecting merchandise and capital flows of trading nations.
130. Flight to Quality -- A broad trend of selling of riskier financial assets in trade for safer assets.
131. Flow Variable -- A variable that is measured per unit of time.
132. Foreign Exchange Markets -- A collection of institutions engaged in trading global currencies and
establishing their value relative to one-another.
133. Frictional Unemployment -- Unemployment that exists as a natural consequence of market activity
where individuals are in-between jobs.
134. Full Employment GDP -- A level of aggregate output that results in full emplloyment of a nation's
workforce.
135. Government Expenditure -- Public sector spending on goods and services.
136. Great Depression -- The period from 1929 to 1933 when there was a prolonged and steep decline in
aggregate output and substantial increase in the unemployment rate.
137. Great Recession -- The period from late-2007 to early-2009 when aggregate output declined and
unemployment approached 10% due to a large financial disruption.
138. GDP -- Gross Domestic Product: The market value of all final goods and services produced in a
given time period.
139. Gross Investment -- Investment that includes additions to the capital stock as well a the replacement
of depreciated capital.
140. Highly-Speculative Grade (debt) -- Debt instruments that carry a high probability of default.
141. Human Capital -- A measure of the skills, ability or productivity of human beings.
142. Immigration Policies -- National laws intended to encourage or restrict the flow of individuals and
workers in a given nation.
143. Imperfect Substitutes -- Goods or services that can be used in place of one-another providing
similar, but not identical, levels of satisfaction.
144. Implicit Price Deflator (IPD) -- The ratio between Nominal GDP and Real GDP.
145. Imports -- The purchase of foreign-produced goods and services by domestic buyers.
146. Incentives -- Rewards designed to influence the actions of economic agents.
147. Income Effect -- The influence of a change in purchasing power on the demand for a good or
service.
148. Income Elasticity (of Money Demand) -- The sensitivity of money demand to changes in an
aggregate income measure.
149. Income Producing Asset -- An asset that is used to generate revenue from the production and sale of
goods and services.
150. Income Taxes -- Taxes that are based on and vary with personal or corporate income.
151. Increasing Returns to Scale -- A long run production concept where a doubling of all factor inputs
more than doubles the amount of output.
152. Indifference Curve -- A set different bundles of goods or services which provide the consumer with
the same level of satisfaction (or utility).
153. Indirect Business Taxes -- Taxes that tend to be built into the price of a particular good (i.e. excise
taxes).
154. Indirect Finance -- The transfer of loanable funds (deposits) through the use of financial
intermediaries (commercial banks).
155. Induced Expenditure -- Changes in spending due to changes in (national) income. See the Marginal
Propensity to Spend.
156. Inflation -- An increase in the price level over some defined time period.
157. Inflation (inflationary pressure) -- Aggregate economic events which put upward pressure on the
price level.
158. Inflation Premium -- An addition to nominal interest rates to accomodate expected future inflation.
159. Inflationary economy (inflationary gap) -- Aggregate spending in excess of the full-employment
level of output.
160. Inflationary Expectations -- An anticipated increase in the future price level.
161. Inflationary Gap -- Aggregate spending in excess of the full-employment level of output.
162. Inflationary Pressure -- Aggregate economic events which put upward pressure on the price level.
163. Information Set -- One or several metrics about current and future events used to make economic
decisions.
164. Interest Income -- The periodic payment required from a debt instrument (borrower) as established
contract.
165. Interest-rate Elasticity (of Money Demand) -- The sensitivity of money demand to changed in the
nominal interest rate.
166. Interest Rate Spreads -- The difference among several nominal interest rates, at a point in time,
based on the risk or maturity of underlying debt instruments.
167. Interest Sensitivity of Investment -- A measure of responsiveness of investment expenditure to
changes to the (real) interest rate.
168. Interest Sensitivity of Money Demand -- A measure of responsiveness of the demand for cash
balances to changes in the (nominal) interest rate.
169. Intermediate Goods and Services -- Goods (or services) used to produce other goods (i.e. capital
equipment).
170. Inventory Depletion -- A run-down of business inventories due to unexpected demand for goods
and services.
171. Investment -- Changes to the existing capital stock or business inventories.
172. Investment Expenditure -- Aggregate spending on plant and equipment, residential structures and
business inventory.
173. Investment Grade (debt) -- Debt instruments with low probability of default or inability of the
borrower to service the loan.
174. Iso-profit function -- A set of input-output combinations with corresponding costs and revenue that
deliver the same level of profit.
175. Keynesian Consumption function -- A hypothesized aggregate consumption relationship with
disposable income as the key independent variable.
176. Kondratieff wave -- A busines cycle with a very long period (~50 years) hypothesized to underly
broad investment opportunities and economic activity.
177. Labor Demand (curve) -- The desire by business firms to hire workers based on their productivity
and the revenue generated by the goods produced by those workers.
178. Labor Force Participation Rate -- The ratio of those in the labor force (the employed and
unemployed) and those that are available for work.
179. Labor Income -- The fraction of Total Revenue earned by the sale of a good or service paid to
workers.
180. Labor Intensive Production -- A long-run production process that relies relatively more on labor
rather than other factors of production.
181. Labor Supply (curve) -- A relationship between real wages and labor hours availalbe based on
worker preferences for income and leisure time.
182. Land-use Policies -- Goverment policies that encourage or restrict the use of parcels of land or
natural resources in the production of goods and services.
183. Laspeyres Index -- A weighted average of prices based on the use of base-period consumption
patterns. Also known as the Consumer Price Index (CPI).
184. Lender of Last Resort -- One of the several roles of the Federal Reserve System -- a lender to the
commerical banking system in times of tight liquidity conditions.
185. Life-cycle Hypothesis -- A model of consumption spending based on lifetime spending needs of an
individual and lifetime participation in the workforce.
186. Liquidity -- A measure of the ease by which a financial asset can be converted into a form readily
accepted as payment for goods and services.
187. Liquidity Premium -- An adjustment to a real interest rate to compensate for the direct relationship
between uncertainty and the duration of a debt contract.
188. Living Standards -- Measures of available output per person in a given economy.
189. Loanable Funds -- Private and Public Savings available for borrowing to support investment in
research, housing, plant, equipment and inventories.
190. Loans -- Funds available through the commercial banking system to be borrowed and repaid at
some future date.
191. Long Run Aggregate Supply -- A measure of potential output in an economy -- usually modelled in
aggregate-price output space but independent of the price-level.
192. Long term (rates) -- Borrowing and lending costs/yields on financial instruments with maturities
more than 10 years.
193. Long-term (assets/debt) -- Financial instruments with maturities exceeding 10 years.
194. Lower-bound (zero-lower-bound) -- A minimum level of short-term interest rates below which there
is no stimulative effect on the economy.
195. Lucas Aggregate Supply -- A relationship between the price level and aggregate output allowing for
changes in price expectations.
196. M1 -- A narrow money supply measure that includes currency in circulation and the value of
demand deposits.
197. M2 -- A broad money supply measure that includes currency, demand deposits, and the value of
time deposits.
198. Macroeconomics -- The study of economic behavior in the aggregate used to support economic
policy.
199. Marginal Productivity -- The change in output resulting from a one unit change in a factor input.
200. Marginal Propensity to Consume -- The fraction of each additional dollar of income devoted to
consumption expenditure.
201. Marginal Propensity to Save -- The change in aggregate savings induced by a change in disposable
income.
202. Marginal Revenue Product (MRP) -- The change in the revenue of a firm from hiring one more unit
of a factor input.
203. Market -- A place or institution where buyers and sellers come together and exchange factor inputs
or final goods and services. A market is one of several types of economic rationing systems.
204. Market Interest Rate -- A nominal interest determined by financial market activity or agreed to by
both borrower and lender.
205. Markup -- The difference between the costs of production and prices charged.
206. Maturity -- The date by which repayment of a loan or debt instrument must be made.
207. Medium of Exchange -- An artifact, usually, currency, that will be accepted for trade with other
goods and services.
208. Medium-term (assets/debt) -- Financial instruments with maturities between 1 and 10 years.
209. Medium term (rates) -- Borrowing and lending costs/yields on financial instruments with maturities
of 1 to 10 years.
210. Microeconomics -- The study of the behavior of individual economic agents -- households and
business firms and prices established in the marketplace.
211. Monetary Base -- Also known as High-powered Money Reserves + Currency in the monetary
system -- the main liabilities of the central bank.
212. Monetary Policy -- The use of changes to the money supply, liquidity, lending ability to affect
aggregate economic activity.
213. Monetary Shocks -- A change to the money supply, available liquidity in the financial system and
the structure of interest rates.
214. Money -- Anything that can be used as a: medium of exchange, a store of value and a unit of
account.
215. Money Demand -- The demand by households and business for cash balances and liquidity.
216. Money Demand (demand for money) -- The demand by households and business for cash balances
and liquidity.
217. Money Market Instrument -- A short term (less than 10 years) debt instrument.
218. Money Multiplier -- The relationship between changes in the monetary base and the money supply.
219. Money Stock -- The amount of money (currency and deposit balances) available in an aggregate
economy.
220. Money Supply -- The amount of money (currency and deposit balances) available in an aggregate
economy.
221. Money Supply rule -- An operating rule used by the central bank to implement monetary policy
based on the rate of economic growth and rate of inflation.
222. Multiplier -- The factor (usually greater than one) by which aggregate spending changes for a
measured change in autonomous spending.
223. Multiplier process -- How a given autonomous change in spending becomes income for different
economic agents who then increase their spending which become income for other agents.
224. National Debt -- The accumulation of deficits (government spending in excess of tax revenue
collected) over time.

225. National Income -- The sum of all types of income (wages, net interest, profits, and net rental
income) earned in a given time period by any type of economic agent (individuals or corporation).
226. National Income Accounting -- A set of procedures for measuring aggregate spending and different
aggregate income measures.
227. Natural Rate of Unemployment -- That rate of unemployment where there is neither upward nor
downward pressure on prices.
228. Needs -- Goods and services required for human survival.
229. Net Export Expenditure -- The difference between export expenditure and import expenditure.
230. Net Investment -- Investment exclusive of replacement of depreciated capital.
231. Net Present Value -- The present (discounted) value of a stream of periodic payments from an asset
less the initial cost of that asset.
232. Nominal GDP -- GDP measured at current prices.
233. Nominal Interest Rate -- The interest rate published as part of a debt contract.
234. Non-bank Public -- Households and businesses that interact with the commercial banking system.
235. Non-durable Goods -- Goods that tend to be immediately consumed or deliver consumption
services over a short period of time.
236. Non-human Wealth -- Physical income producing assets or assets that possess some value in trade.
237. Non-Income Producing Asset -- Something of value that does not generate any income or revenue
stream.
238. Normal Good -- A good where quantity demanded increases with increases in consumer income.
239. Normal (Current) Yield -- The ratio between the annual income generated by an asset and its
purchase price. Also known as the present value of a perpetuity.
240. Okun's Law -- An empirical relationship between the unemployment gap (unemployment rate less
the full employment rate) and the GDP gap (Real GDP less potential GDP).
241. Open Market Operations -- The buying and selling of government securities by the Federal Reserve
and the commercial banking system with the goal of affecting aggregate economic activity.
242. Opporutnity Cost -- The value of the next best use of a scarce resource.
243. Optimal Cash Balances -- The desired level of cash holdings given transactions costs and interest
opportunity costs.
244. Paasche Index -- A weighted average of prices based on current expenditure patterns. Also known
as the GDP (or Implicit Price) Deflator.
245. Par Value -- A financial instrument that sells for exactly its face value.
246. Peak -- A point of transition in the business cycle from expansion to contraction.
247. Perfect Substitutes -- Two goods that have identical properties or characteristics and deliver the
same level of satisfaction to the user.
248. Permanent Income -- Expected levels of individual income that guide consumption expenditure
decisions.
249. Permanent Income Hypothesis -- A hypothesized consumption function based on the effect of
permanent (expected) income and transitory (random) income.
250. (the) Phillips Curve -- A theoretical relationship between the unemployment rate of a given
economy and rates of (wage) inflation.
251. Physical Capital -- Tangible plant, machinery, infrastructure and housing units.
252. Population Growth Rate -- The percentage change in population over a defined period of time.
253. Portfolio -- A bundle of financial assets.
254. Potential Output -- A measure of the economy's ability to produce goods and services.
255. Preferences (Individual) -- The ordinal ranking of different goods or bundle of goods.
256. Preferred Habitat Hypothesis -- A hypothesis of the term structure of interest rates based on
institutional preferences for short-term or long-term financial assets.
257. Premium -- A price paid for a financial asset in excess of its face value.
258. Present Value -- The value of a future payment or stream of payments discounted by some
appropriate rate of interest.
259. Present Value of a Perpetuity -- The ratio of the periodic returns of an asset and its acquisition price.
260. Price Level -- An index based on an aggregate of all prices in an economy.
261. Price/Earnings Ratio -- A financial ratio expressed as an integer calculated as the current price of an
asset and the periodic earnings of that asset.
262. Primary Stock/Bond Market -- The market where new shares of stock or new bonds are bought and
sold. Activity in this market represents direct finance where actual borrowing and lending activity
takes place.
263. Private Savings -- The difference between aggregate household disposable income and aggregate
consumption spending.
264. Private Sector -- All households and businesses in the economy.
265. Producer Optimum -- The profit maximizing combination of factor inputs and corresponding output
based on factor prices and price of the output.
266. Producers (Business Firms) -- Institutions (economic agents) that efficiently combine and convert
factor inputs into desired output.
267. Production -- The conversion of factor inputs into goods and services (output).
268. Production Function -- A mathematical / functional relationship between factor inputs and units of
output.
269. Productivity Shock -- A change to the level of factor input productivity leading to more or less
output for a given quantity of inputs.
270. Profits -- The difference between sales revenue and the costs of production.
271. Profit Maximization -- Output and pricing choices that result in the greatest difference between
revenue earned and the costs of production.
272. Profit Maximizing Behavior -- Output and pricing choices that result in the greatest difference
between revenue earned and the costs of production.
273. Public Savings -- The surplus of tax revenue over and above government expenditure. If there is a
deficit then this value is negative.
274. Public Sector -- All government taxing and spending jurisdictions in a given economy.
275. Purchasing Power -- The quantity of goods and services that may be acquired by a given level of
income at a given level of prices.
276. Purchasing Power Parity -- An exchange rate between two trading nations in combination with
domestic prices that allow the same quantity of goods to be acquired.
277. Quantitative Easing -- A relatively new monetary policy tool used by the Federal Reserve system
when other traditional tools become ineffective. Refers to the purchase of other assets to inject
liquidity into the economy.
278. Quantity Demanded -- Holding other exogenous variables constant (Income, Price of Related
Goods, Preferences), the amount of a good a consumer chooses to purchase at a given price.
279. the Quantity Equation -- Also known as the Equation of Exchange, an identity relating the amount
of money in circulation to the price level and level of outputin an aggregate economy.
280. Quantity Supplied -- Holding other exogenous variables constant (Technology, Factor Prices, Taxed
and Subsidies), the amount of a good a producer/seller chooses to sell at a given price..
281. Rate of Depreciation -- The rate by which a unit of capital wears out per unit of time.
282. Rate of Discount -- The value of a good or financial asset today relative to its value at some point in
the future.
283. Rate of Economic Growth -- The percentage change in Real GDP per unit of time.
284. Rate of Inflation -- The percentage change in a Price Index (the Consumer Price Index) per unit of
time.
285. Rate of Time Preference -- The equivalent of a personal interest (or discount) rate. The measure by
which individuals compare current and future economic activity.
286. Rational (rationality) -- The consistent behavior of economic agents towards different pairings of
goods taking into account available incentives.
287. Rational Expectations -- A theoretical paradigm of macroeconomic policy that assumes that
economic agent take into account all available information and past experiences in how they react
to policy changes.
288. Rationing Systems -- A chosen method of allocating scarce resources among different economic
agents.
289. Real Economic Activity -- Aggregate economic changes in actual goods and services rather than a
money measure of these changes.
290. Real Economic Growth (rate) -- The percentage change in aggregate output of an economy per unit
of time.
291. Real Exchange Rates -- Nominal Exchange rates adjusted for differences in the price level of a pair
of trading nations.
292. Real GDP -- GDP measured at constant (some base period) prices.
293. Real Interest Rate -- An interest rate that has been adjusted for changes in the price level or changes
in purchasing power over some time period.
294. Real Rate of Return -- The yield on an asset adjusted for changes in the price level or purchasing
power of the periodic payments.
295. Real wage -- A nominal (money) wage adjusted for changes in the price level -- measures the
purchasing power of wages paid.
296. Recession -- Negative growth in Real GDP for two or more fiscal quarters.
297. Recessionary economy (recessionary gap) -- Aggregate spending that falls short of the full-
employment level of output.
298. Relative Price -- A ratio of any two prices or one particular price compared to a price index.
299. Rental Cost of Capital -- The cost of a unit of capital taking into account borrowing costs,
opportunity costs, depreciation, inflation and its price.
300. Required Reserves -- A fraction of deposits, mandated by the Federal Reserve, that must be held as
vault cash or on deposit with the Fed.
301. Reserve Requirement -- The percentage of deposits, mandated by the Federal Reserve, that must be
held as vault cash or on deposit with the Fed.
302. Reserves (total reserves) -- The sum of required reserves and excess reserves held by a commerical
bank.
303. Resource Allocation -- Choices made about how factor inputs are used in production and final
output is distributed among economic agents.
304. Retained Earnings -- The fraction of profits that a corporation uses for internal investment needs
and not paid out as dividends.
305. Risk -- A measure of uncertainty about the value of an asset or the benefits of some economic
activity.
306. Risk Premium -- An adjustment to a real interest rate to compensate for uncertainty in the ability of
a borrower to service a loan.
307. Risk Averse -- Behavior by economic agents who have a preference for avoiding or minimizing
risk.
308. Risk Seeking -- Behavior by economic agent who embrace risk.
309. Risk-free Asset -- A financial instrument that has no probability of default.
310. Risk-Return Locus -- A set of risk-return combinations that occur with different portfolio of
financial assets.
311. Savings -- The difference between income and expenditure in the current time period.
312. Savings Glut -- When the total quantity of global savings exceeds the borrowing needs of business
and governments.
313. Savings Rate -- The ratio of aggregate savings relative to aggregate income.
314. Scarcity -- A physical or economic condition where the quantity desired of a good or service
exceeds the availability of that good or service in the absence of a rationing system.
315. Secondary Stock/Bond Market -- The market where existing shares of stock or existing bonds are
traded. This market provides liquidity to these types of financial assets.
316. Securities -- A debt instrument used to facilitate borrowing by business and government.
317. Segmented Markets Hypothesis -- A hypothesis about the term structure of interest rates that
concludes that short-term and long-term assets are highly imperfect substitutes.
318. a Share of Stock -- A financial instrument that give the holder a share of ownership in a publicly
held corporation.
319. Short-term (assets/debt) -- A financial instrument with a maturity of one year or less.
320. Short term (rates) -- Borrowing and lending costs/yields on financial instruments with maturities of
one year or less.
321. Shortage -- A market condition where the quantity demanded of a particular good or service exceed
the quantity available.
322. Solow Growth Model -- A model of economic growth placing strong emphasis on the amount of
captial avialable to labor.
323. Speculation -- The purchase of a good or asset not intended for final consumption but rather in the
expectation of future sale at some higher price.
324. Speculative Demand for Money -- The desire to hold cash balances to quickly take advantage of
rising yields on financial assets.
325. Speculative Grade (debt) -- Debt that has some measurable risk of default.
326. Spending Multiplier -- The relationship between an autonomous spending shock and eventual
changes in aggregate income.
327. Standard of Living -- The ratio of the output of an economy and population. Also known as per-
capita output.
328. Stock Variable -- An economic variable measured at a point in time.
329. Store of Value -- A characteristic of money that allows for value comparisons over different periods
of time.
330. Structural Unemployment -- Unemployment that exists as a consequence of structural changes in
economic activity.
331. Subsidies -- A payment to a private individual or firm from the government usually intended to
encourage a certain type of economic activity.
332. Substitution Effect -- The impact of a relative price change on bundle choices of goods and
services.
333. Supply -- A relationship between market price and quantities of goods and services made available
for sale in a given period of time.
334. Supply of Loanable Funds -- Private and public savings made available to financial markets.
335. Supply-side Policy -- Macroeconomic policies designed to improve the availability of factor inputs
or the level of technology.
336. Supply-side Shock -- An exogenous change to the ability to produce in an aggregate economy.
337. Surplus -- A market condition where the quantity supplied exceeds the quantity demanded.
338. T-Bill (Treasury Bill) -- A short-term (maturity of one year or less) government debt instrument.
339. T-Bond (Treasury Bond) -- A long-term (maturity of more than 10 years) government debt
instrument.
340. T-Note (Treasury Note) -- A medium-term (maturity of one to 10 years) government debt
instrument.
341. Taxes (tax revenue) -- Funds collected by a governmental jusridiction to provide the revenue to
support public expenditure.
342. Time Deposits -- Deposits in the commercial banking system where advance notice for withdrawl
can be (but seldom is) requested.
343. Time series -- Data observations collected on a single variable over a regular period of time (daily,
weekly, monthly, quarterly, annually).
344. Tobin's Q -- A metric defining the desire to add or reduce the capital stock.
345. Trade Deficit -- An imbalance in the current account where import expenditure exceed export
expenditure.
346. Transactions Costs -- The costs related to converting illiquid assets to cash balances.
347. Transactions Demand for Money -- The desire to hold cash balances to facilitate the buying and
selling of goods and services.
348. Transitory Income -- Unexpected changes or shocks to individual income. Often measured as the
difference between observed income and permanent income.
349. Trough -- A point of transition in the business cycle from contraction to expansion.
350. Unanticipated Shock -- A change in an exogenous variable not expected and leading to potentially
sub-optimal outcomes.
351. Uncertainty -- A lack of information about current and future economic events.
352. Unemployment -- The difference between the number of people in the labor force and those
working for pay.
353. Unemployment Rate -- The percentage of the labor force who are actively seeking work.
354. Unit of Account -- A characteristic of money that provides for the communication of the price of all
goods, services and factor inputs.
355. Utility -- A measure of the satisfaction received from some type of economic activity (i.e.
consumption of goods and services or the sale of factor services).
356. Utility Maximization -- A consumption decision among different bundle choices that provides the
greatest possible level of satisfaction.
357. Variance -- The dispersion of the value of individual observations of a variable around the mean of
that variable.
358. Wage Elastic -- Labor supply decisions that are sensitive to change in nominal wages.
359. Wage Inelastic -- Labor supply decisions that are insensitive to changes in nominal wages.
360. Wants -- The infinite desire for goods and services over-and-above human needs.
361. Wealth -- A stock variable that measures the difference between household assets and liabilities.
362. Velocity (of money) -- The number of times a given quantity (stock) of money changes hands in a
given time period (the ratio of expenditure in that time period to a given measure of the money
supply).
363. Yield -- The ratio between the flow of returns (income, revenue, profits) generated by an asset and
the purchase price of that asset.
Macroeconomic Theory

A Glossary of Macroeconomic Terms

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A Glossary of Macroeconomic Terms 07/09/2022, 10:24 AM

A Glossary of Macroeconomics Terms

1. The Accelerator -- A parameter that defines the relationship between

collected) over time.

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