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| Question | Answer |
| Aggregate Demand | The quantity demanded of all goods and services (Real GDP) at different price levels, ceteris paribus. |
| Aggregate Demand (AD) Curve | A curve that shows the quantity demanded of all goods and services (Real GDP) at different price levels, ceteris paribus. |
| Real Balance Effect | The change in the purchasing power of dollar-denominated assets that results from a change in the price level. |
| Monetary Wealth | The value of a person’s monetary assets. |
| Purchasing Power | The quantity of goods and services that can be purchased with a unit of money. This and the price level are inversely related: As the price level goes up (down), this goes down (up). |
| Interest Rate Effect | The changes in household and business buying as the interest rate changes (in turn, a reflection of a change in the demand for or supply of credit brought on by price level changes). |
| International Trade Effect | The change in foreign sector spending as the price level changes. |
| Wealth | The value of all assets owned, both monetary and nonmonetary. |
| Exchange Rate | The price of one currency in terms of another currency. |
| Appreciation | An increase in the value of one currency relative to other currencies. |
| Depreciation | A decrease in the value of one currency relative to other currencies. |
| Velocity | The average number of times a dollar is spent to buy final goods and services in a year. |
| Aggregate Supply | The quantity supplied of all goods and services (Real GDP) at different price levels, ceteris paribus. |
| Short-Run Aggregate Supply (SRAS) Curve | A curve that shows the quantity supplied of all goods and services (Real GDP) at different price levels, ceteris paribus. |
| Short-Run Equilibrium | The condition in the economy when the quantity demanded of Real GDP equals the (short-run) quantity supplied of Real GDP. This condition is met where the aggregate demand curve intersects the short-run aggregate supply curve. |
| Natural Real GDP | The Real GDP that is produced at the natural unemployment rate. Also, the Real GDP that is produced when the economy is in long-run equilibrium. |
| Long-Run Aggregate Supply (LRAS) Curve | A curve that represents the output the economy produces when wages and prices have adjusted to their final equilibrium levels and when workers do not have any relevant misperceptions. This curve is a vertical line at the level of Natural Real GDP. |
| Long-Run Equilibrium | The condition that exists in the economy when wages and prices have adjusted to their (final) equilibrium levels and when workers do not have any relevant misperceptions. Graphically, long-run equilibrium occurs at the intersection of the AD and LRAS curves. |
| Say’s Law | Supply creates its own demand. Production creates enough demand to purchase all the goods and services the economy produces. |
| Recessionary Gap | The condition in which the Real GDP that the economy is producing is less than the Natural Real GDP and the unemployment rate is greater than the natural unemployment rate. |
| Inflationary Gap | The condition in which the Real GDP that the economy is producing is greater than the Natural Real GDP and the unemployment rate is less than the natural unemployment rate. |
| Laissez-faire | A public policy of not interfering with market activities in the economy. |
| Efficiency Wage Models | These models hold that it is sometimes in the best interest of business firms to pay their employees wage rates that are higher than the equilibrium wage rate. |
| Consumption Function | The relationship between consumption and disposable income. Used in this text, consumption is directly related to disposable income and is positive even at zero disposable income: C = C0 + (MPC)(Yd). |
| Marginal Propensity to Consume (MPC) | The ratio of the change in consumption to the change in disposable income: This = ΔC/ΔYd. |
| Autonomous Consumption | The part of consumption that is independent of disposable income. |
| Marginal Propensity to Save (MPS) | The ratio of the change in saving to the change in disposable income: This = ΔS/ΔYd |
| Multiplier | The number that is multiplied by the change in autonomous spending to obtain the change in total spending. This is equal to 1 ÷ (1 - MPC). If the economy is operating below Natural Real GDP, then this is the number that is multiplied by the change in autonomous spending to obtain the change in Real GDP. |
| Progressive Income Tax | An income tax system in which one’s tax rate rises as taxable income rises (up to some point). |
| Proportional Income Tax | An income tax system in which a person’s tax rate is the same regardless of taxable income. |
| Regressive Income Tax | An income tax system in which a person’s tax rate declines as his or her taxable income rises. |
| Budget Deficit | Government expenditures greater than tax revenues. |
| Budget Surplus | Tax revenues greater than government expenditures. |
| Balanced Budget | Government expenditures equal to tax revenues. |
| Cyclical Deficit | The part of the budget deficit that is a result of a downturn in economic activity. |
| Structural Deficit | The part of the budget deficit that would exist even if the economy were operating at full employment. |
| Public Debt | The total amount that the federal government owes its creditors. |
| Fiscal Policy | Changes in government expenditures and/or taxes aimed at achieving economic goals, such as low unemployment, stable prices, and economic growth. |
| Expansionary Fiscal Policy | Increases in government expenditures and/or decreases in taxes in order to achieve particular economic goals. |
| Contractionary Fiscal Policy | Decreases in government expenditures and/or increases in taxes in order to achieve economic goals. |
| Discretionary Fiscal Policy | Deliberate changes in government expenditures and/or taxes in order to achieve economic goals. |
| Automatic Fiscal Policy | Changes in government expenditures and/or taxes that occur automatically without (additional) congressional action. |
| Crowding Out | The decrease in private expenditures that occurs as a consequence of increased government spending or the need to finance a budget deficit. |
| Complete Crowding Out | A decrease in one or more components of private spending that completely offsets the increase in government spending. |
| Incomplete Crowding Out | A decrease in one or more components of private spending that only partially offsets the increase in government spending. |
| Marginal (Income) Tax Rate | The change in a person’s tax payment divided by the change in taxable income: ΔTax payment ÷ ΔTaxable income. |
| Laffer Curve | The curve, named after an economist, that shows the relationship between tax rates and tax revenues. According to this curve, as tax rates rise from zero, tax revenues rise, reach a maximum at some point, and then fall with further increases in tax rates. |
| Tax Base | In terms of income taxes, the total amount of taxable income. Tax revenue = This x (average) Tax rate |
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