Money multiplier: The increase in the mon-ey supply resulting from a one-dollar increase in the monetary base.
High-powered money: The sum of currency and bank reserves; also called the monetary base.
Lender of last resort: The role a central bank plays when it lends to .nancial institutions in the midst of a liquidity crisis.
Discount rate: The interest rate that the Fed charges when it makes loans to banks.
Reserve requirements: Regulations imposed on banks by the central bank that specify a mini-mum reserveCdeposit ratio.
Excess reserves: Reserves held by banks above the amount mandated by reserve requirements.
Interest on reserves: The central banks pol-icy of paying banks an interest rate for the deposits that they hold as reserves.
Chapter 5

Unit .ve
Quantity theory of money: The doctrine em-phasizing that changes in the quantity of money lead to changes in nominal expenditure.
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.
Transactions velocity of money: The ra-tio of the dollar value of all transactions to the money supply.
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Real money balances: The quantity of mon-ey expressed in terms of the quantity of goods and services it can buy; the quantity of money divided by the price level (M/P).
Money demand function: A function show-ing the determinants of the demand for real money balances; for example, (M/P )d = L(i, Y ).
Seigniorage: The revenue raised by the gov-ernment through the creation of money; also called the in.ation tax.
Fisher equation: The equation stating that the nominal interest rate is the sum of the real in-terest rate and expected in.ation (i = r -Eπ).
Ex ante real interest rate: The real inter-est rate anticipated when a loan is made; the nom-inal interest rate minus expected in.ation. (Cf. ex post real interest rate.)
Ex post real interest rate: The real inter-est rate actually realized; the nominal interest rate minus actual in.ation. (Cf. ex ante real interest rate.)
Shoeleather cost: The cost of in.ation from reducing real money balances, such as the incon-venience of needing to make more frequent trips to the bank.
Menu cost: The cost of changing a price.
Hyperin.ation: Extremely high in.ation.
Real: Measured in constant dollars; adjusted for in.ation. (Cf. nominal.)
Nominal: Measured in current dollars; not ad-justed for in.ation. (Cf. real.)
Classical dichotomy: The theoretical sepa-ration of real and nominal variables in the classical model, which implies that nominal variables do not in.uence real variables. (Cf. neutrality of money.)
Neutrality of money: The property that a change in the money supply does not in.uence real variables. (Cf. classical dichotomy.)
Chapter 6

Unit six
Trade balance: The receipts from exports mi-nus the payments for imports.
Net capital out.ow: The net .ow of funds being invested abroad; domestic saving minus do-mestic investment; also called net foreign invest-ment.
Trade de.cit: An excess of imports over ex-ports.
Trade surplus: An excess of exports over im-ports.
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Small open economy: An open economy that takes its interest rate as given by world .nan-cial 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.)
World interest rate: The interest rate pre-vailing in world .nancial markets.
Fiscal policy: The governments choice re-garding levels of spending and taxation.
Monetary policy: The central banks choice regarding the supply of money
Exchange rate: The rate at which a country makes exchanges in world markets. (Cf. nominal exchange rate, real exchange rate.)
Nominal exchange rate: The rate at which one countrys currency trades for another countrys currency. (Cf. exchange rate, real exchange rate.)
Real exchange rate: The rate at which one countrys goods trade for another countrys goods. (Cf. exchange rate, nominal exchange rate.)
Purchasing-power parity: The doctrine ac-cording to which goods must sell for the same price in every country, implying that the nominal ex-change rate re.ects di.erences in price levels.
Large open economy: An open economy that can in.uence its domestic interest rate; an economy that, by virtue of its size, can have a sub-stantial impact on world markets and, in partic-ular, on the world interest rate. (Cf. small open economy.)
Chapter 7

Unit seven
Natural rate of unemployment: The steadys-tate rate of unemployment; the rate of unemploy-ment toward which the economy gravitates in the long run.
Frictional unemployment: The unemploy-ment that results because it takes time for workers to search for the jobs that best suit their skills and tastes. (Cf. structural unemployment.)
Sectoral shift: A change in the composition of demand among industries or regions.
Unemployment insurance: A governmen-
33
t program under which unemployed workers can collect bene.ts for a certain period of time after losing their jobs.
Wage rigidity: The failure of wages to adjust to equilibrate labor supply and labor demand.
Structural unemployment: The unemploy-ment resulting from wage rigidity and job rationing. (Cf. frictional unemployment.)
Insiders: Workers who are already employed and therefore have an in.uence on wage bargain-ing. (Cf. outsiders.)
Outsiders: Workers who are not employed and therefore have no in.uence on wage bargaining. (Cf. insiders.)
E.ciency-wage theories: Theories of real-
wage rigidity and unemployment according to which .rms raise labor productivity and pro.ts by keep-ing real wages above the equilibrium level.
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.)
Moral hazard: The possibility of dishonest or otherwise inappropriate behavior in situation-s in which behavior is imperfectly monitored; for example, in e.ciency-wage theory, the possibility that low-wage workers may shirk their responsibil-ities and risk getting caught and .red.
Chapter 8

Unit eight
Solow growth model: A model showing how saving, population growth, and technological progress determine the level of and growth in the standard of living.
Depreciation: 1. The reduction in the cap-ital stock that occurs over time because of aging and use. 2. A fall in the value of a currency rel-ative to other currencies in the market for foreign exchange. (Cf. appreciation.)
Steady state: A condition in which key vari-ables are not changing.
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Gold standard: A monetary system in which gold serves as money or in which all money is con-vertible into gold at a .xed rate.
Chapter 9

Unit nine
E.ciency of labor: A variable in the Solow growth model that measures the health, education, skills, and knowledge of the labor force.
E.ciency units of labor: A measure of the labor force that incorporates both the number of workers and the e.ciency of each worker.
Labor-augmenting technological progress: Advances in productive capability that raise the ef-.ciency of labor.
Balanced growth: The condition under which many economic variables, such as income per per-
39
son, capital per person, and the real wage, all grow at the same rate.
Convergence: The tendency of economies with di.erent initial levels of income to become more similar in income over time.
Budget de.cit: A shortfall of receipts from expenditure.
Budget surplus: An excess of receipts over expenditure.
Human capital: The accumulation of invest-ments in people, such as education.
Endogenous growth theory: Models of e-conomic growth that try to explain the rate of tech-nological change.
Creative destruction: The process where-by entrepreneurs introduce innovations that ren-der some incumbent producers unpro.table while promoting overall economic growth.
Chapter 10

Unit ten
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.
Leading indicators: Economic variables that .uctuate in advance of the economys output and thus signal the direction of economic .uctuations.
Aggregate demand: The negative relation-ship between the price level and the aggregate quan-tity of output demanded that arises from the inter-action between the goods market and the money market.
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Aggregate supply: The relationship between the price level and the aggregate quantity of out-put .rms produce.
Shock: An exogenous change in an economic relationship, such as the aggregate demand or ag-gregate supply curve.
Demand shocks: Exogenous events that shift the aggregate demand curve.
Supply shocks: Exogenous events that shift the aggregate supply curve.
Stabilization policy: Public policy aimed at reducing the severity of short-run economic .uctu-ations.
Stag.ation: A situation of falling output and rising prices; combination of stagnation and in.a-tion.
Chapter 11

Unit eleven
IS-LM model: A model of aggregate demand that shows what determines aggregate income for a given price level by analyzing the interaction be-tween the goods market and the money market. (Cf. IS curve, LM curve.)