Keynesian cross: A simple model of income determination, based on the ideas in Keyness Gen-eral Theory, which shows how changes in spending can have a multiplied e.ect on aggregate income.
Keynesian model: A model derived from the ideas of Keyness General Theory; a model based on the assumptions that wages and prices do not adjust to clear markets and that aggregate demand
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determines the economys output and employment. (Cf. classical model.)
Government-purchases multiplier: The change in aggregate income resulting from a one-dollar change in government purchases.
Tax multiplier: The change in aggregate in-come resulting from a one-dollar change in taxes.
Theory of liquidity preference: A simple model of the interest rate, based on the ideas in Keyness General Theory, which says that the in-terest rate adjusts to equilibrate the supply and demand for real money balances.
Chapter 12

Unit twelve
Monetary transmission mechanism: The process by which changes in the money supply in-.uence the amount that households and .rms wish to spend on goods and services.
Pigou e.ect: The increase in consumer spend-ing that results when a fall in the price level rais-es real money balances and, thereby, consumers wealth.
Debt-de.ation theory: A theory according to which an unexpected fall in the price level redis-tributes real wealth from debtors to creditors and, therefore, reduces total spending in the economy.
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Chapter 13

Unit thirteen
MundellCFleming model: The ISCLM mod-el for a small open economy.
Floating exchange rate: An exchange rate that the central bank allows to change in response to changing economic conditions and economic poli-cies. (Cf. .xed exchange rate.)
Fixed exchange rate: An exchange rate that is set by the central banks willingness to buy and sell the domestic currency for foreign currencies at a predetermined price. (Cf. .oating exchange rate.)
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Devaluation: An action by the central bank to decrease the value of a currency under a system of .xed exchange rates. (Cf. revaluation.)
Revaluation: An action undertaken by the central bank to raise the value of a currency under a system of .xed exchange rates. (Cf. devalua-tion.)
Speculative attack: The massive selling of a countrys currency, often because of a change in in-vestors perceptions, that renders a .xed exchange rate untenable.
Currency board: A .xed exchange rate sys-tem under which a central bank backs all of the na-tions currency with the currency of another coun-try.
Dollarization: The adoption of the U.S. dol-lar as the currency in another country.
Impossible trinity: The fact that a nation cannot simultaneously have free capital .ows, a .xed exchange rate, and independent monetary policy. Sometimes called the trilemma of inter-national .nance.
Chapter 14

Unit fourteen
Sticky-price model: The model of aggregate supply emphasizing the slow adjustment of the prices of goods and services.
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 ser-vices in the economy.
Phillips curve: A negative relationship be-tween in.ation and unemployment; in its modern form, a relationship among in.ation, cyclical un-employment, expected in.ation, and supply shock-s, derived from the short-run aggregate supply curve.
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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.)
Demand-pull in.ation: In.ation resulting from shocks to aggregate demand. (Cf. cost-push in.ation.)
Cost-push in.ation: In.ation resulting from shock-s to aggregate supply. (Cf. demand-pull in.ation.)
Sacri.ce ratio: The number of percentage points of a years real GDP that must be forgone to reduce in.ation by 1 percentage point.
Rational expectations: An approach that assumes that people optimally use all available in-formation including information about current and prospective policiesto forecast the future. (Cf. adap-tive expectations.)
Natural-rate hypothesis: The premise that .uctuations in aggregate demand in.uence 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.
Hysteresis: The long-lasting in.uence of his-tory, such as on the natural rate of unemployment.