Activists

Economists who believe that discretionary changes in monetary and fiscal policy can reduce the degree of instability in output and employment.

Adaptive-Expectations Hypothesis 

The hypothesis that economic decision-makers base their future expectations on actual outcomes observed during recent periods.  For example, according to this view, the rate of inflation actually experienced during the past two or three years would be the major determinant of the rate of inflation expected for the next year.

Administrative Lag 

The time period after the need for a policy change is recognized but before the policy is actually implemented.

Automatic Stabilizers 

Built-in features that tend automatically to promote a budget deficit during a recession and budget surplus during an inflationary boom, even without a change in policy.

Balanced Budget 

A situation in which current government revenue from taxes, fees, and other sources is just equal to current government expenditures.

Bank Reserves 

Vault cash deposits of banks with Federal Reserve banks.

Budget Deficit 

A situation in which total government spending exceeds total government revenue during a specific time period, usually one year.

Budget Surplus 

A situation in which total government spending is less than total government revenue during a time period, usually a year.

Central Bank 

An institution that regulates the banking system and controls the supply of a country’s money.

Commercial Banks 

Financial institutions that offer a wide range of services (for example, checking accounts, savings accounts, and loans) to their customers.  Commercial banks are owned by stockholders and seek to operate at a profit.

Counter-cyclical Policy 

A policy that tends to move the economy in an opposite direction from the forces of the business cycle.  Such a policy would stimulate demand during the contraction phase of the business cycle and restrain demand during the expansion.

Credit

Funds acquired by borrowing.

Credit Unions 

Financial cooperative organization of individuals with a common affiliation (such as an employer or a labor union).  They accept deposits, including checkable deposits, pay interest (or dividends) on them out of earnings. And lend funds primarily to members.

Crowding-Out Effect 

A reduction in private spending as a result of higher interest rates generated by budget deficits that are financed by borrowing in the private loanable funds market.

Demand Deposits 

Non-interest-earning checking deposits that can be either withdrawn or made payable on demand to a third party.  Like currency, these deposits are widely used as a means of payment.

Demand for Money 

A curve that indicates the relationship between the interest rate and the quantity of money people want to hold.  Because higher interest rates increase the opportunity cost of holding money, the quantity of money demanded will be inversely related to the interest rate. 

Depository Institution 

Businesses that accept checking and savings deposits and use a portion of them to extend loans and make investments.  Banks, savings, and loan associations, and credit unions are examples.

Discount Rate 

The interest rate the Federal Reserve charges banking institutions for short-term loans.

Discretionary Fiscal Policy 

A change, in laws or appropriation levels, that alters government revenues and/or expenditures.

Exchange Rate 

The price of one unit of foreign currency in terms of the domestic currency.  For example, if it takes $1.50 to purchase an English pound, the dollar-pound exchange rate is 1.50

Expansionary Fiscal Policy 

An increase in government expenditures and/or a reduction in tax rates, such that the expected size of the budget deficit expands.

Expansionary Monetary Policy 

A shift in monetary policy designed to stimulate aggregate demand.  Injection of additional bank reserves, lower short-term interest rates, and acceleration in the growth rate of the money supply are indicators of a more expansionary monetary policy. 

Federal Reserve System 

The central bank of the United States; it carries out banking regulatory policies and is responsible for the conduct of monetary policy.

Fiat Money 

Money that has neither intrinsic value nor the backing of a commodity with intrinsic value; paper currency is an example.

Impact Lag 

The time period after a policy change is implemented but before the change begins to exert its primary effects.

Index of Leading Indicators 

An index of economic variables that historically has tended to turn down prior to the beginning of a recession and turn up prior to the beginning of a business expansion.

Less Developed Countries 

Countries with low per capita incomes, low levels of education, widespread illiteracy, and widespread use of production methods that are largely obsolete in high-income countries.  They are sometimes referred to as developing= countries.

Liquid Assets 

An asset that can be easily and quickly converted to money without loss of value.

M1 (Money Supply) 

The sum of (1) currency in circulation (including coins), (2) checkable deposits maintained in depository institutions, and (3) traveler’s checks.

M2 (Money Supply) 

Equal to M1 plus (1) savings deposits, (2) time-deposits (accounts of less than $100,000) held in depository institutions, and (3) money market mutual fund shares.

Medium of Exchange 

An asset that is used to buy and sell goods services.

Monetary Base 

The sum of currency in circulation plus bank reserves (vault cash and reserves with the Fed).  It reflects the purchases of financial assets and extension of loans by the Fed.

Money Market Mutual Fund 

Interest-earning accounts that pool depositors’ funds and invest them in highly liquid short-term securities.  Because these securities can be quickly converted to cash, depositors are permitted to write checks  (which reduce their share holdings) against their accounts.

Monetarist

A group of economist who believe that (1) monetary instability is the major cause of fluctuations in real GDP and (2) rapid growth of the money supply is the major cause of inflation.

New Classical Economist 

Economists who believe that there are strong forces pushing a market economy toward full-employment equilibrium and that macroeconomic policy is an ineffective tool with which to reduce economic instability.

Normative Economics 

Judgments about “what ought to be” in economic matters.  Normative economic views cannot be proved false because they are based on value judgments.

Open Market Operations 

The buying and selling of U.S. government securities and other financial assets in the open market by the Federal Reserve.

Rational-Expectations Hypothesis 

The hypothesis that economic decision-makers weigh all available evidence, including information concerning the probable effects of current and future economic policy, when they form their expectations about future economic events (like the probable future inflation rate).

Recognition Lag 

The time period after a policy change is needed from a stabilization standpoint but before the need is recognized by policy-makers.

Resource Market  

A highly aggregated market encompassing all resources (labor, physical capital, land, and entrepreneurship) contributing to the production of current output.  The labor market is the largest component of this market. 

Restrictive Fiscal Policy 

A reduction in government expenditures and/or an increase in tax rates such that the expected size of the budget deficit declines (or the budget surplus increases).

Ricardian equivalence 

The view that a tax reduction financed with government debt will exert no effect on current consumption and aggregate demand because people will fully recognize the higher future taxes implied by the additional debt.

Rule of 70 

If a variable grows at a rate of x percent per year, 70/x will approximate the number of years required for the variable to double.

Savings and Loan Association 

Financial institutions that accept deposits in exchange for shares that pay dividends.  Historically, these funds were channeled into residential mortgage loans, but today they offer essentially the same services as a commercial bank.

Store of Value 

An asset that will allow people to transfer purchasing power from one period to the next.

Supply-side Economists 

Economists who believe that changes in marginal tax rates exert important effects on aggregate supply.

Technological Advancement 

The introduction of new techniques or methods that increase output per unit of input.

Transaction Costs 

The time, effort, and other resources needed to search out, negotiate, and complete an exchange.

Unit of Account 

A unit of measurement used by people to post prices and keep track of revenues and costs.

World Trade Organization (WTO) 

The new name given to GATT in 1994; the WTO is currently responsible for monitoring and enforcing multilateral trade agreements among 153 member countries.