| Term | Definition |
|---|---|
| capital | A factor of production consisting of tools, equipment, and infrastructure used to produce goods and services. |
| factors of production | The resources used to produce goods and services, including land, labor, capital, and entrepreneurship. |
| labor | A factor of production consisting of human effort and skills used to produce goods and services. |
| land | A factor of production that includes natural resources and physical space used in production. |
| non-rival | A characteristic of a good or resource where one person's use does not prevent another person from using it simultaneously. |
| resources | Inputs or materials used to produce goods and services, including factors of production such as land, labor, and capital. |
| scarcity | The fundamental economic problem that resources are limited while wants and needs are unlimited. |
| trade-offs | The choices made when selecting one option over another due to limited resources and competing wants. |
| Term | Definition |
|---|---|
| constant opportunity costs | A situation where the opportunity cost of producing one good remains the same regardless of the quantity produced, resulting in a linear PPC. |
| decreasing opportunity costs | A situation where the opportunity cost of producing one good decreases as more of that good is produced, resulting in a bowed-in PPC. |
| economic contraction | A decrease in an economy's capacity to produce goods and services, typically represented by an inward shift of the PPC. |
| economic growth | An increase in the production of goods and services in an economy over time, measured by the growth rate of real GDP per capita. |
| efficiency | The production of the maximum output from a given set of resources, represented by points on the PPC. |
| factors of production | The resources used to produce goods and services, including land, labor, capital, and entrepreneurship. |
| increasing opportunity costs | A situation where the opportunity cost of producing one good increases as more of that good is produced, resulting in a bowed-out PPC. |
| inefficiency | A situation where resources are not being used optimally, resulting in production below the maximum possible output. |
| opportunity cost | The value of the next best alternative that must be given up when making a choice. |
| Production Possibilities Curve | A graph showing the maximum combinations of two goods that can be produced with available resources and technology. |
| productivity | The amount of output produced per unit of input, such as output per worker or output per hour of labor. |
| scarcity | The fundamental economic problem that resources are limited while wants and needs are unlimited. |
| technology | Tools, techniques, and knowledge used in production that improve efficiency and output. |
| trade-offs | The choices made when selecting one option over another due to limited resources and competing wants. |
| underutilized resources | Resources that are not being used to their full productive capacity, represented by points inside the PPC. |
| Term | Definition |
|---|---|
| absolute advantage | A situation in which an individual, business, or country can produce more of a good or service than any other producer with the same quantity of resources. |
| comparative advantage | The ability of a producer to create a good or service at a lower opportunity cost than another producer. |
| consumption opportunities | The range of goods and services that can be consumed, which may extend beyond what a producer can make alone through specialization and trade. |
| gains from trade | The economic benefits that result when producers specialize according to comparative advantage and engage in mutually beneficial exchange. |
| mutually beneficial trade | Exchange between trading partners where both parties gain from the transaction. |
| opportunity cost | The value of the next best alternative that must be given up when making a choice. |
| Production Possibilities Curve | A graph showing the maximum combinations of two goods that can be produced with available resources and technology. |
| specialization | The concentration of production effort by individuals, regions, or countries on goods or services in which they have a comparative advantage. |
| terms of trade | The ratio at which one good or service is exchanged for another; the price at which trade occurs between trading partners. |
| Term | Definition |
|---|---|
| consumer income | The total earnings and resources available to consumers, which influences their ability and willingness to purchase goods and services. |
| demand curve | A graph showing the relationship between the price of a good and the quantity demanded, typically downward-sloping to reflect the law of demand. |
| determinants of demand | Factors that influence and cause changes in the quantity of a good or service that consumers are willing and able to buy at various price levels. |
| downward-sloping demand curve | A demand curve that slopes downward from left to right, illustrating the inverse relationship between price and quantity demanded. |
| good | A tangible product that can be produced, bought, and sold in a market. |
| inverse relationship | A relationship between two variables where one increases as the other decreases, and vice versa. |
| law of demand | An economic principle stating that there is an inverse relationship between the price of a good and the quantity demanded by consumers, all else being equal. |
| market demand curve | A graph showing the relationship between the price of a good and the total quantity demanded by all consumers in a market at each price level. |
| price | The amount of money required to purchase a good or service. |
| quantity demanded | The amount of a good or service that consumers are willing and able to purchase at a specific price. |
| service | An intangible product or activity provided by a producer to satisfy consumer wants. |
| shift in demand | A change in the entire demand curve caused by factors other than price, resulting in consumers demanding different quantities at each price level. |
| Term | Definition |
|---|---|
| determinants of supply | Factors that influence the quantity of goods and services producers are willing and able to supply at various price levels. |
| good | A tangible product that can be produced, bought, and sold in a market. |
| input prices | The costs of resources and factors of production used to produce goods and services. |
| law of supply | An economic principle stating that there is a positive relationship between the price of a good and the quantity suppliers are willing to produce and sell. |
| market supply curve | A graph showing the relationship between the price of a good and the total quantity supplied by all producers in the market at each price level. |
| positive relationship | A direct relationship between two variables where an increase in one corresponds to an increase in the other. |
| price | The amount of money required to purchase a good or service. |
| quantity supplied | The amount of a good or service that producers are willing and able to offer for sale at a given price. |
| service | An intangible product or activity provided by a producer to satisfy consumer wants. |
| shift | A change in the entire supply curve caused by factors other than price, resulting in a different quantity supplied at each price level. |
| supply curve | A graph showing the relationship between the price of a good and the quantity supplied, typically upward-sloping to reflect the law of supply. |
| Term | Definition |
|---|---|
| demand | The quantity of a good or service that consumers are willing and able to buy at various price levels. |
| determinants of demand | Factors that influence and cause changes in the quantity of a good or service that consumers are willing and able to buy at various price levels. |
| determinants of supply | Factors that influence the quantity of goods and services producers are willing and able to supply at various price levels. |
| disequilibrium | A market condition in which the quantity supplied does not equal the quantity demanded, causing imbalances that create surpluses or shortages. |
| equilibrium | A market condition in which the quantity supplied equals the quantity demanded at a particular price, with no tendency for change. |
| equilibrium price | The price at which the quantity demanded equals the quantity supplied, resulting in no tendency for change. |
| equilibrium quantity | The quantity bought and sold at market equilibrium, where quantity demanded equals quantity supplied. |
| market equilibrium | The price and quantity at which the quantity demanded equals the quantity supplied in a market. |
| market forces | The supply and demand pressures that drive prices toward equilibrium in response to surpluses and shortages. |
| quantity demanded | The amount of a good or service that consumers are willing and able to purchase at a specific price. |
| quantity supplied | The amount of a good or service that producers are willing and able to offer for sale at a given price. |
| shortage | A situation in which the quantity demanded of a good exceeds the quantity supplied at a given price, resulting in insufficient supply to meet consumer demand. |
| supply | The quantity of a good or service that producers are willing and able to offer for sale at various price levels. |
| surplus | A situation in which the quantity supplied of a good exceeds the quantity demanded at a given price, resulting in excess inventory in the market. |
| Term | Definition |
|---|---|
| circular flow diagram | A model that illustrates how income and expenditure flow between households, businesses, and the government in an economy. |
| expenditures approach | A method of measuring GDP by summing all spending on final goods and services: consumption, investment, government spending, and net exports. |
| final output | Goods and services that are ready for consumption or investment, not intermediate goods used in production. |
| Gross Domestic Product | The total monetary value of all final goods and services produced within a country during a specific period. |
| income approach | A method of measuring GDP by summing all incomes earned in the production of goods and services, including wages, profits, and rent. |
| nominal GDP | The total monetary value of all final goods and services produced in an economy during a specific period, measured using current prices without adjustment for inflation. |
| value-added approach | A method of measuring GDP by summing the value added at each stage of production to avoid double-counting. |
| Term | Definition |
|---|---|
| economic performance | The overall health and productivity of an economy, typically measured through indicators such as GDP, inflation, and unemployment. |
| Gross Domestic Product | The total monetary value of all final goods and services produced within a country during a specific period. |
| inflation rate | The percentage change in the general price level of goods and services in an economy over a specific time period. |
| nonmarket transactions | Economic activities that are not bought or sold in markets, such as household production, volunteer work, or informal economy activities, and therefore are not captured in GDP. |
| unemployment rate | The percentage of the labor force that is actively seeking employment but currently unemployed, calculated as (number of unemployed / labor force) × 100. |
| Term | Definition |
|---|---|
| cyclical unemployment | Unemployment that fluctuates with the business cycle, increasing during recessions and decreasing during expansions due to changes in aggregate demand. |
| discouraged workers | Individuals who have stopped actively seeking employment due to repeated job search failures and are therefore not counted in the official unemployment rate. |
| employment | The state of having a paid job or being engaged in work for compensation. |
| frictional unemployment | Unemployment that occurs when workers are between jobs or entering the labor force, resulting from the time it takes to search for and match with available positions. |
| full employment | An economic condition where all available labor resources are being used efficiently and unemployment is at its natural rate. |
| joblessness | The state of being without employment, including both those officially counted as unemployed and those not captured by the unemployment rate. |
| labor force | The total number of people in an economy who are either employed or actively seeking employment. |
| labor force participation rate | The percentage of the working-age population that is either employed or actively seeking employment, calculated as (labor force / working-age population) × 100. |
| labor market | The market where labor services are bought and sold, involving the interaction between workers seeking employment and employers seeking workers. |
| natural rate of unemployment | The unemployment rate that exists when the economy produces full-employment real output, equal to the sum of frictional and structural unemployment. |
| part-time workers | Individuals employed for fewer hours than a full-time position, who may be underemployed or seeking additional work but are counted as employed in unemployment statistics. |
| structural unemployment | Unemployment resulting from a mismatch between workers' skills and job requirements, or from geographic mismatches between workers and available jobs. |
| types of unemployment | Different categories of unemployment based on the underlying causes, including frictional, structural, and cyclical unemployment. |
| unemployment rate | The percentage of the labor force that is actively seeking employment but currently unemployed, calculated as (number of unemployed / labor force) × 100. |
| Term | Definition |
|---|---|
| base year | A reference year used to standardize prices when calculating real GDP, allowing for comparison of economic output across different time periods. |
| Consumer Price Index | A measure of the average change in prices paid by consumers for goods and services over time. |
| deflation | A sustained decrease in the general price level of goods and services in an economy over time. |
| disinflation | A decrease in the rate of inflation, where prices are still rising but at a slower pace than before. |
| GDP deflator | A price index that measures the ratio of nominal GDP to real GDP, used to convert nominal GDP to real GDP by adjusting for inflation. |
| inflation | A sustained increase in the general price level of goods and services in an economy over time. |
| inflation rate | The percentage change in the general price level of goods and services in an economy over a specific time period. |
| nominal variables | Economic variables measured in current dollars without adjustment for changes in the price level. |
| price indices | Statistical measures that track the average change in prices paid by consumers for a basket of goods and services over time. |
| price level | The average of all prices of goods and services produced in an economy, typically measured by price indices like the CPI. |
| real variables | Economic variables that have been adjusted for inflation by deflating nominal values by the price level, such as real wages. |
| substitution bias | A shortcoming of the CPI where it fails to account for consumers' ability to substitute more expensive goods with cheaper alternatives, causing the CPI to overstate true inflation. |
| Term | Definition |
|---|---|
| borrowers | Individuals or entities that demand loanable funds by taking loans in the loanable funds market. |
| deflation | A sustained decrease in the general price level of goods and services in an economy over time. |
| lenders | Individuals or institutions that provide money or credit to borrowers with the expectation of repayment, often with interest. |
| unexpected inflation | A rise in the general price level of goods and services that occurs contrary to what individuals and businesses anticipated, causing economic disruption. |
| wealth redistribution | The transfer of economic resources or purchasing power from one group of individuals to another, often as an unintended consequence of economic changes. |
| Term | Definition |
|---|---|
| aggregate output | The total quantity of goods and services produced in an economy, typically measured as real GDP. |
| base year | A reference year used to standardize prices when calculating real GDP, allowing for comparison of economic output across different time periods. |
| constant prices | Prices from a fixed base year used to measure output across different time periods while removing the effect of inflation. |
| current prices | The market prices of goods and services in the time period being measured. |
| final goods and services | Products and services produced for end consumers rather than for further processing or resale in the production chain. |
| GDP deflator | A price index that measures the ratio of nominal GDP to real GDP, used to convert nominal GDP to real GDP by adjusting for inflation. |
| nominal GDP | The total monetary value of all final goods and services produced in an economy during a specific period, measured using current prices without adjustment for inflation. |
| price level | The average of all prices of goods and services produced in an economy, typically measured by price indices like the CPI. |
| real GDP | The total monetary value of all final goods and services produced by an economy, adjusted for inflation to reflect actual changes in production. |
| Term | Definition |
|---|---|
| aggregate demand | The total quantity of goods and services demanded across an entire economy at different price levels. |
| aggregate output | The total quantity of goods and services produced in an economy, typically measured as real GDP. |
| aggregate supply | The total quantity of goods and services that producers are willing and able to supply at various price levels. |
| business cycle | Fluctuations in aggregate output and employment caused by changes in aggregate supply and/or aggregate demand. |
| expansion | A phase of the business cycle characterized by an increase in aggregate output and employment. |
| full employment | An economic condition where all available labor resources are being used efficiently and unemployment is at its natural rate. |
| natural rate of unemployment | The unemployment rate that exists when the economy produces full-employment real output, equal to the sum of frictional and structural unemployment. |
| output gap | The difference between actual output and potential output in an economy. |
| peak | A turning point in the business cycle where aggregate output reaches its highest level before declining. |
| potential output | The maximum level of real GDP an economy can produce when all resources are fully and efficiently utilized. |
| recession | A period of economic contraction characterized by declining GDP and reduced economic activity. |
| trough | A turning point in the business cycle where aggregate output reaches its lowest level before increasing. |
| turning points | The moments in the business cycle where the direction of economic activity changes, specifically peaks and troughs. |
| Term | Definition |
|---|---|
| aggregate demand | The total quantity of goods and services demanded across an entire economy at different price levels. |
| Aggregate Demand curve | A graph showing the relationship between the price level and the quantity of goods and services demanded in an economy at all price levels. |
| aggregate output | The total quantity of goods and services produced in an economy, typically measured as real GDP. |
| aggregate supply | The total quantity of goods and services that producers are willing and able to supply at various price levels. |
| consumption | Spending by households on goods and services, which is affected by changes in tax revenues and disposable income. |
| exchange rate effect | The change in net exports that results from changes in the exchange rate caused by changes in the price level. |
| government spending | Government expenditures that can affect the demand for loanable funds and interest rates. |
| interest rate effect | The change in investment and consumption spending that results from changes in interest rates caused by changes in the price level. |
| investment | Spending by firms on capital goods and equipment, a component of aggregate demand. |
| macroeconomic shocks | Unexpected events or changes that significantly impact the overall economy, affecting output, employment, and price levels. |
| net exports | The difference between a country's total exports and total imports; a component of aggregate demand. |
| price level | The average of all prices of goods and services produced in an economy, typically measured by price indices like the CPI. |
| quantity of goods and services demanded | The total amount of final goods and services that buyers are willing and able to purchase at a given price level. |
| real wealth effect | The change in consumer spending that results from changes in the real value of wealth caused by changes in the price level. |
| shift of the AD curve | A change in aggregate demand at every price level, caused by changes in consumption, investment, government spending, or net exports independent of price level changes. |
| Term | Definition |
|---|---|
| aggregate demand | The total quantity of goods and services demanded across an entire economy at different price levels. |
| autonomous expenditures | Spending that is independent of income levels and initiates changes in total expenditures and output. |
| disposable income | Income remaining after taxes that consumers can spend or save. |
| expenditure multiplier | A measure that quantifies the size of the change in aggregate demand resulting from a change in any component of aggregate demand. |
| marginal propensity to consume | The change in consumer spending divided by the change in disposable income; represents the fraction of additional income that consumers spend. |
| marginal propensity to save | The fraction of additional income that consumers save; equals one minus the marginal propensity to consume. |
| real GDP | The total monetary value of all final goods and services produced by an economy, adjusted for inflation to reflect actual changes in production. |
| spending | The total amount of money spent on goods and services in an economy, including consumption, investment, government purchases, and net exports. |
| tax multiplier | The ratio of the change in real output to an initial change in taxes, indicating how much aggregate demand changes from each dollar of tax change. |
| taxes | Government revenues that affect disposable income and the supply of loanable funds available for borrowing. |
| Term | Definition |
|---|---|
| aggregate output | The total quantity of goods and services produced in an economy, typically measured as real GDP. |
| employment | The state of having a paid job or being engaged in work for compensation. |
| inflation | A sustained increase in the general price level of goods and services in an economy over time. |
| inflation-unemployment trade-off | The short-run inverse relationship between inflation and unemployment, where lower unemployment is associated with higher inflation and vice versa. |
| inflationary expectations | The anticipated rate of inflation that consumers and businesses expect to occur in the future, influencing their economic decisions. |
| labor force | The total number of people in an economy who are either employed or actively seeking employment. |
| price level | The average of all prices of goods and services produced in an economy, typically measured by price indices like the CPI. |
| production costs | The expenses incurred by firms in producing goods and services, including wages, materials, and other inputs. |
| quantity of goods and services supplied | The total amount of output (real GDP) that producers are willing and able to supply at different price levels. |
| Short-Run Aggregate Supply curve | A graph showing the relationship between the price level and the quantity of goods and services supplied in an economy in the short run. |
| sticky prices | Prices that do not adjust quickly to changes in economic conditions, remaining fixed in the short run. |
| sticky wages | Wages that do not adjust quickly to changes in economic conditions, remaining fixed in the short run. |
| Term | Definition |
|---|---|
| employment | The state of having a paid job or being engaged in work for compensation. |
| fixed input prices | Input prices, such as wages, that cannot adjust immediately and remain constant in the short run. |
| flexible prices | Prices that can adjust freely in response to changes in supply and demand, characteristic of the long run. |
| flexible wages | Wages that can adjust freely in response to changes in labor market conditions, characteristic of the long run. |
| full employment | An economic condition where all available labor resources are being used efficiently and unemployment is at its natural rate. |
| inflation | A sustained increase in the general price level of goods and services in an economy over time. |
| long run | A time period in macroeconomics where all factors of production are variable and prices fully adjust to changes in supply and demand. |
| Long-Run Aggregate Supply curve | A vertical line on a graph representing the maximum sustainable output an economy can produce when all resources are fully employed and wages and prices have fully adjusted. |
| long-run trade-off | The absence of a permanent relationship between inflation and unemployment in the long run, as all prices and wages fully adjust. |
| maximum sustainable capacity | The total output an economic system will produce over a set period of time if all resources are fully employed. |
| Production Possibilities Curve | A graph showing the maximum combinations of two goods that can be produced with available resources and technology. |
| short run | A time period in macroeconomics where at least one factor of production is fixed and prices may not fully adjust to changes in demand. |
| Term | Definition |
|---|---|
| Aggregate Demand curve | A graph showing the relationship between the price level and the quantity of goods and services demanded in an economy at all price levels. |
| aggregate quantity of output demanded | The total amount of real output that all buyers in an economy are willing and able to purchase at different price levels. |
| aggregate quantity of output supplied | The total amount of real output that all producers in an economy are willing and able to supply at different price levels. |
| equilibrium output level | The level of real output at which the quantity demanded equals the quantity supplied in the economy. |
| equilibrium price level | The price level at which the quantity of real output demanded equals the quantity of real output supplied. |
| full employment | An economic condition where all available labor resources are being used efficiently and unemployment is at its natural rate. |
| inflationary output gap | A positive output gap occurring when actual real output exceeds the full-employment level of output, putting upward pressure on prices. |
| Long-Run Aggregate Supply curve | A vertical line on a graph representing the maximum sustainable output an economy can produce when all resources are fully employed and wages and prices have fully adjusted. |
| long-run equilibrium | The point where the short-run Phillips curve intersects the long-run Phillips curve, representing a stable economic state. |
| output gap | The difference between actual output and potential output in an economy. |
| Short-Run Aggregate Supply curve | A graph showing the relationship between the price level and the quantity of goods and services supplied in an economy in the short run. |
| short-run equilibrium | The point where aggregate demand and short-run aggregate supply intersect, determining the current price level and output in the Phillips curve model. |
| Term | Definition |
|---|---|
| aggregate demand shock | A sudden, unexpected change in the total demand for goods and services in an economy, causing shifts in the AD curve. |
| aggregate output | The total quantity of goods and services produced in an economy, typically measured as real GDP. |
| aggregate supply shock | An unexpected event that causes a sudden shift in the aggregate supply curve, affecting the economy's ability to produce goods and services. |
| cost-push inflation | Inflation caused by a decrease in aggregate supply due to rising production costs, pushing prices upward. |
| demand-pull inflation | Inflation caused by an increase in aggregate demand that pulls prices upward when the economy is near full capacity. |
| employment | The state of having a paid job or being engaged in work for compensation. |
| negative shock | An unexpected event that decreases aggregate demand or aggregate supply, leading to decreases in output and employment. |
| positive shock | An unexpected event that increases aggregate demand or aggregate supply, leading to increases in output and employment. |
| price level | The average of all prices of goods and services produced in an economy, typically measured by price indices like the CPI. |
| short run | A time period in macroeconomics where at least one factor of production is fixed and prices may not fully adjust to changes in demand. |
| Term | Definition |
|---|---|
| aggregate demand | The total quantity of goods and services demanded across an entire economy at different price levels. |
| aggregate output | The total quantity of goods and services produced in an economy, typically measured as real GDP. |
| aggregate supply shock | An unexpected event that causes a sudden shift in the aggregate supply curve, affecting the economy's ability to produce goods and services. |
| economic growth | An increase in the production of goods and services in an economy over time, measured by the growth rate of real GDP per capita. |
| employment | The state of having a paid job or being engaged in work for compensation. |
| flexible wages and prices | The ability of wages and prices to adjust upward or downward in response to changes in supply and demand. |
| full employment | An economic condition where all available labor resources are being used efficiently and unemployment is at its natural rate. |
| long run | A time period in macroeconomics where all factors of production are variable and prices fully adjust to changes in supply and demand. |
| Long-Run Aggregate Supply curve | A vertical line on a graph representing the maximum sustainable output an economy can produce when all resources are fully employed and wages and prices have fully adjusted. |
| natural rate of unemployment | The unemployment rate that exists when the economy produces full-employment real output, equal to the sum of frictional and structural unemployment. |
| price level | The average of all prices of goods and services produced in an economy, typically measured by price indices like the CPI. |
| short-run aggregate supply | The total quantity of goods and services that firms are willing to produce at different price levels in the short run, when some prices are sticky. |
| Term | Definition |
|---|---|
| AD-AS model | An economic model that shows the relationship between aggregate demand and aggregate supply to illustrate macroeconomic equilibrium and the effects of policy changes. |
| aggregate demand | The total quantity of goods and services demanded across an entire economy at different price levels. |
| contractionary fiscal policy | Government spending decreases or tax increases designed to decrease aggregate demand and reduce inflation. |
| discretionary fiscal policy | Government spending and taxation decisions made by policymakers to influence economic activity, as opposed to automatic stabilizers. |
| expansionary fiscal policy | Government spending increases or tax decreases designed to increase aggregate demand and stimulate economic growth. |
| fiscal policy | Government spending and taxation decisions that influence aggregate demand, real output, price level, and exchange rates. |
| full employment | An economic condition where all available labor resources are being used efficiently and unemployment is at its natural rate. |
| government spending | Government expenditures that can affect the demand for loanable funds and interest rates. |
| government spending multiplier | The ratio of the change in real output to an initial change in government spending, indicating how much aggregate demand increases from each dollar of government spending. |
| inflationary output gap | A positive output gap occurring when actual real output exceeds the full-employment level of output, putting upward pressure on prices. |
| lags | Delays between the time a policy action is taken and when its effects are fully realized in the economy. |
| macroeconomic goals | Broad economic objectives that governments aim to achieve, such as full employment, price stability, and economic growth. |
| price level | The average of all prices of goods and services produced in an economy, typically measured by price indices like the CPI. |
| real output | The total production of goods and services in an economy adjusted for inflation, measured in constant dollars. |
| short-run effects | The immediate economic impacts of a policy action on output, employment, and prices in the near term. |
| tax multiplier | The ratio of the change in real output to an initial change in taxes, indicating how much aggregate demand changes from each dollar of tax change. |
| taxes | Government revenues that affect disposable income and the supply of loanable funds available for borrowing. |
| transfers | Government payments to individuals or groups that do not represent payment for current goods or services, such as social security or unemployment benefits. |
| Term | Definition |
|---|---|
| automatic stabilizers | Government policies and programs that automatically adjust to support the economy during recessions and prevent overheating during expansionary periods without requiring deliberate policy changes. |
| business cycle | Fluctuations in aggregate output and employment caused by changes in aggregate supply and/or aggregate demand. |
| consumption | Spending by households on goods and services, which is affected by changes in tax revenues and disposable income. |
| expansionary periods | Periods of economic growth when GDP is rising and the economy is expanding. |
| Gross Domestic Product | The total monetary value of all final goods and services produced within a country during a specific period. |
| overheating | A condition where the economy grows too rapidly, leading to inflation and unsustainable economic expansion. |
| recession | A period of economic contraction characterized by declining GDP and reduced economic activity. |
| tax revenues | Income collected by the government through taxation. |
| transfer payments | Government payments to individuals or groups that are not in exchange for goods or services, such as social security or welfare benefits. |
| Term | Definition |
|---|---|
| bond price | The market value of a bond at any given time, which fluctuates inversely with changes in interest rates. |
| bonds | Interest-bearing financial assets that represent a loan to a borrower, typically a government or corporation. |
| cash | Physical currency in the form of bills and coins, representing the most liquid form of money. |
| demand deposits | Bank deposits that can be withdrawn on demand without penalty, such as checking accounts. |
| financial assets | Claims on future income or assets that can be held as stores of value, including money, bonds, and stocks. |
| interest rates | The cost of borrowing money, influenced by monetary policy and affecting exchange rates through changes in currency demand. |
| liquidity | The ease with which a financial asset can be quickly converted into cash without significant loss of value. |
| opportunity cost | The value of the next best alternative that must be given up when making a choice. |
| previously issued bonds | Bonds that were sold in the past and are now trading in the secondary market at prices that may differ from their original issue price. |
| rate of return | The gain or loss on a financial asset, typically expressed as a percentage of the initial investment over a specific time period. |
| risk | The uncertainty or potential for loss associated with holding a financial asset. |
| stocks | Equity financial assets that represent ownership shares in a corporation. |
| Term | Definition |
|---|---|
| expected inflation | The anticipated rate of increase in the general price level that lenders and borrowers use when determining nominal interest rates. |
| expected real interest rate | The anticipated return on a loan adjusted for expected inflation, used by lenders and borrowers to establish nominal interest rates. |
| inflation | A sustained increase in the general price level of goods and services in an economy over time. |
| nominal interest rate | The stated interest rate on a loan or investment, not adjusted for inflation. |
| real interest rate | The interest rate adjusted for inflation, reflecting the true purchasing power gained or lost from lending or borrowing. |
| Term | Definition |
|---|---|
| bank reserves | Money held by banks that is not loaned out, including reserves required by the Federal Reserve and excess reserves. |
| currency in circulation | Physical money (coins and paper bills) that is in use by the public and businesses. |
| M1 | A monetary aggregate that includes the most liquid forms of money, such as currency in circulation and checking accounts. |
| M2 | A monetary aggregate that includes M1 plus less liquid assets such as savings accounts and money market accounts. |
| measures of money | Quantitative calculations used to determine the money supply, including monetary aggregates such as M1 and M2. |
| medium of exchange | A function of money that allows it to be used to purchase goods and services. |
| monetary aggregates | Different measures of the money supply, including M1 and M2, that categorize money based on liquidity. |
| monetary base | The total amount of money created by a central bank, consisting of currency in circulation and bank reserves. |
| money | Any asset that is accepted as a means of payment for goods and services. |
| money supply | The total amount of money available in an economy at a given time, including currency in circulation and deposits in financial institutions. |
| store of value | A function of money that allows it to be saved and used to purchase goods and services in the future. |
| unit of account | A function of money that provides a standard measure for comparing the value of different goods and services. |
| Term | Definition |
|---|---|
| balance sheets | Financial statements that show a bank's assets, liabilities, and equity at a specific point in time, used to analyze the effects of banking system changes. |
| bank reserves | Money held by banks that is not loaned out, including reserves required by the Federal Reserve and excess reserves. |
| banking system | The network of financial institutions, including commercial banks and central banks, that facilitate the creation and circulation of money in an economy. |
| depository institutions | Financial institutions such as commercial banks that accept deposits from the public and use those funds to make loans. |
| excess reserves | Reserves held by banks beyond the required minimum, which can be loaned out to expand the money supply. |
| fractional reserve banking | A banking system in which depository institutions hold only a fraction of their deposits in reserve and lend out the remainder. |
| monetary base | The total amount of money created by a central bank, consisting of currency in circulation and bank reserves. |
| money multiplier | The factor by which the money supply increases relative to an increase in the monetary base through the lending activities of commercial banks. |
| money supply | The total amount of money available in an economy at a given time, including currency in circulation and deposits in financial institutions. |
| money supply expansion | The process by which the banking system increases the total amount of money in circulation through lending based on excess reserves. |
| required reserve ratio | The percentage of deposits that commercial banks are required to hold in reserve rather than lend out, used as a monetary policy tool. |
| required reserves | The minimum amount of reserves that depository institutions are legally required to hold, determined by the required reserve ratio. |
| Term | Definition |
|---|---|
| central bank | A financial institution responsible for implementing monetary policy and managing a country's money supply and banking system. |
| demand for money | The quantity of money that individuals and businesses want to hold at different interest rates and price levels. |
| disequilibrium | A market condition in which the quantity supplied does not equal the quantity demanded, causing imbalances that create surpluses or shortages. |
| equilibrium | A market condition in which the quantity supplied equals the quantity demanded at a particular price, with no tendency for change. |
| equilibrium nominal interest rate | The interest rate at which the quantity of money demanded equals the quantity of money supplied in the money market. |
| market forces | The supply and demand pressures that drive prices toward equilibrium in response to surpluses and shortages. |
| monetary base | The total amount of money created by a central bank, consisting of currency in circulation and bank reserves. |
| monetary policy | Central bank actions that influence the money supply, interest rates, aggregate demand, real output, price level, and exchange rates. |
| money market | The market where money supply and money demand interact to determine the equilibrium nominal interest rate. |
| money supply | The total amount of money available in an economy at a given time, including currency in circulation and deposits in financial institutions. |
| nominal interest rate | The stated interest rate on a loan or investment, not adjusted for inflation. |
| price level | The average of all prices of goods and services produced in an economy, typically measured by price indices like the CPI. |
| quantity demanded of money | The amount of money that individuals and businesses wish to hold at a given nominal interest rate. |
| supply of money | The total quantity of money available in an economy, controlled by the central bank through monetary policy. |
| surpluses | A situation in the money market where the quantity of money supplied exceeds the quantity of money demanded at a given nominal interest rate. |
| Term | Definition |
|---|---|
| AD-AS model | An economic model that shows the relationship between aggregate demand and aggregate supply to illustrate macroeconomic equilibrium and the effects of policy changes. |
| adjustment lag | The time it takes for the economy to respond and adjust to a monetary policy action after it has been implemented. |
| aggregate demand | The total quantity of goods and services demanded across an entire economy at different price levels. |
| central bank | A financial institution responsible for implementing monetary policy and managing a country's money supply and banking system. |
| contractionary monetary policy | Central bank actions that decrease the money supply and raise interest rates to reduce inflation and cool down an overheating economy. |
| discount rate | The interest rate at which a central bank lends to commercial banks, used as a tool of monetary policy. |
| expansionary monetary policy | Central bank actions that increase the money supply and lower interest rates to stimulate economic growth and reduce unemployment. |
| federal funds rate | The interest rate at which commercial banks lend reserve balances to each other overnight, targeted by the Federal Reserve as its primary policy rate. |
| full employment | An economic condition where all available labor resources are being used efficiently and unemployment is at its natural rate. |
| inflationary output gap | A positive output gap occurring when actual real output exceeds the full-employment level of output, putting upward pressure on prices. |
| interest on reserves | The interest rate paid by a central bank to commercial banks on the reserves they hold, used as a monetary policy tool. |
| lags | Delays between the time a policy action is taken and when its effects are fully realized in the economy. |
| monetary base | The total amount of money created by a central bank, consisting of currency in circulation and bank reserves. |
| monetary policy | Central bank actions that influence the money supply, interest rates, aggregate demand, real output, price level, and exchange rates. |
| money market model | An economic model that shows the relationship between the money supply, money demand, and interest rates. |
| money multiplier | The factor by which the money supply increases relative to an increase in the monetary base through the lending activities of commercial banks. |
| nominal interest rate | The stated interest rate on a loan or investment, not adjusted for inflation. |
| open market operations | The buying and selling of government securities by a central bank to influence the money supply and monetary base. |
| policy rate | The target interest rate set by a central bank for overnight interbank lending to influence overall monetary conditions. |
| price level | The average of all prices of goods and services produced in an economy, typically measured by price indices like the CPI. |
| price stability | A macroeconomic goal in which the general price level of goods and services remains relatively constant over time. |
| real output | The total production of goods and services in an economy adjusted for inflation, measured in constant dollars. |
| recognition lag | The time it takes for policymakers to identify and recognize that a problem exists in the economy. |
| required reserve ratio | The percentage of deposits that commercial banks are required to hold in reserve rather than lend out, used as a monetary policy tool. |
| reserve market model | An economic model that illustrates the relationship between the supply and demand for bank reserves and the federal funds rate. |
| Term | Definition |
|---|---|
| borrowers | Individuals or entities that demand loanable funds by taking loans in the loanable funds market. |
| closed economy | An economy that does not engage in international borrowing, lending, or trade with other countries. |
| demand for loanable funds | The quantity of loanable funds that borrowers are willing to borrow at various real interest rates, showing an inverse relationship with real interest rates. |
| determinants of demand | Factors that influence and cause changes in the quantity of a good or service that consumers are willing and able to buy at various price levels. |
| determinants of supply | Factors that influence the quantity of goods and services producers are willing and able to supply at various price levels. |
| disequilibrium | A market condition in which the quantity supplied does not equal the quantity demanded, causing imbalances that create surpluses or shortages. |
| equilibrium | A market condition in which the quantity supplied equals the quantity demanded at a particular price, with no tendency for change. |
| equilibrium interest rate | The interest rate at which the quantity of loanable funds demanded equals the quantity supplied. |
| equilibrium quantity of funds | The amount of loanable funds exchanged when the quantity demanded equals the quantity supplied. |
| government borrowing | When a government borrows money, typically by issuing bonds, to finance a budget deficit. |
| government spending | Government expenditures that can affect the demand for loanable funds and interest rates. |
| investment tax credit | A tax incentive that reduces taxes on business investment, increasing the demand for loanable funds. |
| loanable funds market | The market where savers supply funds available for borrowing and borrowers demand funds, with the real interest rate serving as the price. |
| market forces | The supply and demand pressures that drive prices toward equilibrium in response to surpluses and shortages. |
| national savings | The total amount of income in an economy that is not spent on consumption, consisting of public savings and private savings in a closed economy. |
| net capital inflow | The net flow of foreign investment into a country, representing the difference between foreign investment in the domestic economy and domestic investment abroad. |
| open economy | An economy that engages in international trade and allows the free flow of goods, services, and financial capital across borders. |
| private savings | The portion of household and business income that is not spent on consumption. |
| public savings | The portion of government tax revenue that is not spent on government consumption and transfer payments. |
| quantity demanded of loanable funds | The amount of funds that borrowers wish to borrow at a given real interest rate in the loanable funds market. |
| quantity supplied of loanable funds | The amount of funds that savers are willing to lend at a given real interest rate in the loanable funds market. |
| real interest rate | The interest rate adjusted for inflation, reflecting the true purchasing power gained or lost from lending or borrowing. |
| savers | Individuals or entities that supply loanable funds by lending money in the loanable funds market. |
| saving behavior | The decisions households and businesses make about how much income to save versus spend, which affects the supply of loanable funds. |
| shortage | A situation in which the quantity demanded of a good exceeds the quantity supplied at a given price, resulting in insufficient supply to meet consumer demand. |
| supply of loanable funds | The quantity of loanable funds that savers are willing to lend at various real interest rates, showing a positive relationship with real interest rates. |
| surplus | A situation in which the quantity supplied of a good exceeds the quantity demanded at a given price, resulting in excess inventory in the market. |
| taxes | Government revenues that affect disposable income and the supply of loanable funds available for borrowing. |
| Term | Definition |
|---|---|
| aggregate demand | The total quantity of goods and services demanded across an entire economy at different price levels. |
| contractionary fiscal policy | Government spending decreases or tax increases designed to decrease aggregate demand and reduce inflation. |
| contractionary monetary policy | Central bank actions that decrease the money supply and raise interest rates to reduce inflation and cool down an overheating economy. |
| expansionary fiscal policy | Government spending increases or tax decreases designed to increase aggregate demand and stimulate economic growth. |
| expansionary monetary policy | Central bank actions that increase the money supply and lower interest rates to stimulate economic growth and reduce unemployment. |
| full employment | An economic condition where all available labor resources are being used efficiently and unemployment is at its natural rate. |
| inflationary output gap | A positive output gap occurring when actual real output exceeds the full-employment level of output, putting upward pressure on prices. |
| interest rates | The cost of borrowing money, influenced by monetary policy and affecting exchange rates through changes in currency demand. |
| price level | The average of all prices of goods and services produced in an economy, typically measured by price indices like the CPI. |
| real output | The total production of goods and services in an economy adjusted for inflation, measured in constant dollars. |
| Term | Definition |
|---|---|
| demand shocks | Unexpected changes in aggregate demand that cause movement along the short-run Phillips curve. |
| employment | The state of having a paid job or being engaged in work for compensation. |
| inflation | A sustained increase in the general price level of goods and services in an economy over time. |
| inflationary gap | An economic condition represented by points to the left of long-run equilibrium, where actual output exceeds potential output and inflation pressures exist. |
| long run | A time period in macroeconomics where all factors of production are variable and prices fully adjust to changes in supply and demand. |
| long-run equilibrium | The point where the short-run Phillips curve intersects the long-run Phillips curve, representing a stable economic state. |
| long-run Phillips curve | A vertical curve at the natural rate of unemployment that illustrates the long-run relationship between inflation and unemployment. |
| natural rate of unemployment | The unemployment rate that exists when the economy produces full-employment real output, equal to the sum of frictional and structural unemployment. |
| Phillips curve model | An economic model showing the relationship between the rate of inflation and the rate of unemployment in an economy. |
| recessionary gap | An economic condition represented by points to the right of long-run equilibrium, where actual output falls short of potential output and unemployment is elevated. |
| short run | A time period in macroeconomics where at least one factor of production is fixed and prices may not fully adjust to changes in demand. |
| short-run equilibrium | The point where aggregate demand and short-run aggregate supply intersect, determining the current price level and output in the Phillips curve model. |
| short-run Phillips curve | A downward-sloping curve that illustrates the short-run trade-off between inflation and unemployment in an economy. |
| supply shocks | Unexpected changes in aggregate supply that cause the short-run Phillips curve to shift. |
| Term | Definition |
|---|---|
| deflation | A sustained decrease in the general price level of goods and services in an economy over time. |
| full employment | An economic condition where all available labor resources are being used efficiently and unemployment is at its natural rate. |
| inflation | A sustained increase in the general price level of goods and services in an economy over time. |
| inflation rate | The percentage change in the general price level of goods and services in an economy over a specific time period. |
| money supply | The total amount of money available in an economy at a given time, including currency in circulation and deposits in financial institutions. |
| price level | The average of all prices of goods and services produced in an economy, typically measured by price indices like the CPI. |
| quantity theory of money | An economic theory stating that the money supply multiplied by its velocity of circulation equals the price level multiplied by real output, establishing a direct relationship between money supply growth and inflation. |
| real output | The total production of goods and services in an economy adjusted for inflation, measured in constant dollars. |
| velocity | The average number of times a unit of money is spent on final goods and services in a given time period. |
| Term | Definition |
|---|---|
| burden of the national debt | The economic and fiscal consequences and challenges that result from a large national debt, including effects on interest payments, economic growth, and future fiscal policy. |
| government budget deficit | The situation when tax revenues fall short of government purchases plus transfer payments in a given year. |
| government budget surplus | The situation when tax revenues exceed government purchases plus transfer payments in a given year. |
| government purchases | Spending by the government on goods and services. |
| national debt | The total accumulated debt owed by the government, which increases when budget deficits occur and requires interest payments. |
| tax revenues | Income collected by the government through taxation. |
| transfer payments | Government payments to individuals or groups that are not in exchange for goods or services, such as social security or welfare benefits. |
| Term | Definition |
|---|---|
| crowding out | The phenomenon where increased government borrowing leads to higher interest rates, which reduces private investment spending. |
| economic growth | An increase in the production of goods and services in an economy over time, measured by the growth rate of real GDP per capita. |
| equilibrium real interest rate | The interest rate at which the quantity of loanable funds supplied equals the quantity demanded. |
| fiscal policy | Government spending and taxation decisions that influence aggregate demand, real output, price level, and exchange rates. |
| government borrowing | When a government borrows money, typically by issuing bonds, to finance a budget deficit. |
| government budget deficit | The situation when tax revenues fall short of government purchases plus transfer payments in a given year. |
| loanable funds market | The market where savers supply funds available for borrowing and borrowers demand funds, with the real interest rate serving as the price. |
| physical capital accumulation | The process of building up the stock of productive assets and equipment in an economy. |
| private investment | Spending by the private sector on capital goods and other interest-sensitive expenditures. |
| Term | Definition |
|---|---|
| aggregate employment | The total number of workers employed across an entire economy. |
| aggregate output | The total quantity of goods and services produced in an economy, typically measured as real GDP. |
| aggregate production function | An economic model showing the relationship between total inputs (labor, capital, technology) and total output produced in an economy. |
| economic growth | An increase in the production of goods and services in an economy over time, measured by the growth rate of real GDP per capita. |
| human capital | The skills, knowledge, education, and experience of workers that contribute to their productivity. |
| labor productivity | The amount of output produced per worker, measured as output per employed worker. |
| Long-Run Aggregate Supply curve | A vertical line on a graph representing the maximum sustainable output an economy can produce when all resources are fully employed and wages and prices have fully adjusted. |
| output per capita | The total output produced in an economy divided by the population, showing average production per person. |
| outward shift | Movement of a curve away from the origin, indicating an increase in production capacity or economic output. |
| physical capital | Tangible assets such as machinery, equipment, buildings, and infrastructure used in production. |
| Production Possibilities Curve | A graph showing the maximum combinations of two goods that can be produced with available resources and technology. |
| real GDP per capita | The total value of goods and services produced by an economy adjusted for inflation and divided by the population, used to measure economic growth. |
| rightward shift | Movement of a curve to the right on a graph, indicating an increase in quantity supplied or produced at each price level. |
| technology | Tools, techniques, and knowledge used in production that improve efficiency and output. |
| Term | Definition |
|---|---|
| aggregate demand | The total quantity of goods and services demanded across an entire economy at different price levels. |
| aggregate supply | The total quantity of goods and services that producers are willing and able to supply at various price levels. |
| economic growth | An increase in the production of goods and services in an economy over time, measured by the growth rate of real GDP per capita. |
| incentives | Factors that motivate households and businesses to make economic decisions and take actions. |
| infrastructure | Basic physical systems and facilities, such as roads, bridges, and utilities, that support economic activity. |
| labor force participation | The percentage of the working-age population that is either employed or actively seeking employment. |
| long-run economic growth | The sustained increase in an economy's productive capacity and real GDP over an extended period of time. |
| potential output | The maximum level of real GDP an economy can produce when all resources are fully and efficiently utilized. |
| productivity | The amount of output produced per unit of input, such as output per worker or output per hour of labor. |
| public policies | Government actions and programs designed to influence economic outcomes and achieve specific economic objectives. |
| real GDP per capita | The total value of goods and services produced by an economy adjusted for inflation and divided by the population, used to measure economic growth. |
| supply-side fiscal policies | Government policies that focus on increasing aggregate supply through tax cuts, deregulation, or incentives to boost production, investment, and economic growth. |
| technology | Tools, techniques, and knowledge used in production that improve efficiency and output. |
| Term | Definition |
|---|---|
| balance of payments | A comprehensive accounting record of all economic transactions between a country and the rest of the world, including the current account and capital and financial account. |
| balance of trade | The difference between a country's exports and imports; the net exports component of the current account. |
| capital and financial account | The component of the balance of payments that records transactions involving the purchase and sale of assets, including financial investments and capital transfers between a country and the rest of the world. |
| credit | A transaction in the balance of payments that causes money to flow into a country. |
| current account | The component of the balance of payments that records transactions in goods, services, income, and current transfers between a country and the rest of the world. |
| current account deficit | A situation where a country's current account debits exceed its credits, indicating more money flowing out than in from current account transactions. |
| current account surplus | A situation where a country's current account credits exceed its debits, indicating more money flowing in than out from current account transactions. |
| debit | A transaction in the balance of payments that causes money to flow out of a country. |
| financial capital inflow | Money flowing into a country from foreign investment and asset purchases, recorded as a surplus in the capital and financial account. |
| financial capital outflow | Money flowing out of a country for foreign investment and asset purchases, recorded as a deficit in the capital and financial account. |
| net exports | The difference between a country's total exports and total imports; a component of aggregate demand. |
| net income from abroad | Income earned by residents from foreign sources, recorded in the current account. |
| net unilateral transfers | One-way transfers of money or goods between countries with no expectation of repayment, recorded in the current account. |
| Term | Definition |
|---|---|
| currency | Money issued by a country or economic union that serves as a medium of exchange for goods and services. |
| currency appreciation | An increase in the value of a country's currency relative to other currencies, making exports more expensive and imports cheaper. |
| currency depreciation | A decrease in the value of a country's currency relative to other currencies, making exports cheaper and imports more expensive. |
| currency valuation | The process by which the relative worth or price of one currency is determined compared to other currencies. |
| exchange rate | The price of one currency expressed in terms of another currency in the foreign exchange market. |
| foreign exchange market | The global market where currencies are traded and exchange rates are determined by the supply and demand for different currencies. |
| Term | Definition |
|---|---|
| demand for currency | The quantity of a currency that buyers are willing and able to purchase at various exchange rates, arising from demand for a country's goods, services, and financial assets. |
| disequilibrium | A market condition in which the quantity supplied does not equal the quantity demanded, causing imbalances that create surpluses or shortages. |
| equilibrium | A market condition in which the quantity supplied equals the quantity demanded at a particular price, with no tendency for change. |
| equilibrium exchange rate | The exchange rate at which the quantity of currency demanded equals the quantity supplied, determined by shifts in currency demand and supply. |
| exchange rate | The price of one currency expressed in terms of another currency in the foreign exchange market. |
| foreign exchange market | The global market where currencies are traded and exchange rates are determined by the supply and demand for different currencies. |
| quantity demanded | The amount of a good or service that consumers are willing and able to purchase at a specific price. |
| quantity demanded of a currency | The amount of a currency demanded at a specific exchange rate, which has an inverse relationship with the exchange rate. |
| quantity supplied | The amount of a good or service that producers are willing and able to offer for sale at a given price. |
| quantity supplied of a currency | The amount of a currency supplied at a specific exchange rate, which has a positive relationship with the exchange rate. |
| supply of currency | The quantity of a currency that sellers are willing and able to offer at various exchange rates, arising from making payments in other currencies. |
| surpluses | A situation in the money market where the quantity of money supplied exceeds the quantity of money demanded at a given nominal interest rate. |
| Term | Definition |
|---|---|
| aggregate demand | The total quantity of goods and services demanded across an entire economy at different price levels. |
| demand | The quantity of a good or service that consumers are willing and able to buy at various price levels. |
| demand for currency | The quantity of a currency that buyers are willing and able to purchase at various exchange rates, arising from demand for a country's goods, services, and financial assets. |
| equilibrium exchange rate | The exchange rate at which the quantity of currency demanded equals the quantity supplied, determined by shifts in currency demand and supply. |
| exchange rate | The price of one currency expressed in terms of another currency in the foreign exchange market. |
| fiscal policy | Government spending and taxation decisions that influence aggregate demand, real output, price level, and exchange rates. |
| flexible exchange market | A foreign exchange market where the equilibrium exchange rate is determined freely by the interaction of supply and demand without government intervention. |
| foreign exchange market | The global market where currencies are traded and exchange rates are determined by the supply and demand for different currencies. |
| interest rates | The cost of borrowing money, influenced by monetary policy and affecting exchange rates through changes in currency demand. |
| monetary policy | Central bank actions that influence the money supply, interest rates, aggregate demand, real output, price level, and exchange rates. |
| price level | The average of all prices of goods and services produced in an economy, typically measured by price indices like the CPI. |
| quotas | Limits on the quantity of imported goods that affect the supply of foreign currency. |
| real output | The total production of goods and services in an economy adjusted for inflation, measured in constant dollars. |
| supply | The quantity of a good or service that producers are willing and able to offer for sale at various price levels. |
| supply of currency | The quantity of a currency that sellers are willing and able to offer at various exchange rates, arising from making payments in other currencies. |
| tariffs | Taxes imposed on imported goods that affect the supply of foreign currency. |
| Term | Definition |
|---|---|
| aggregate demand | The total quantity of goods and services demanded across an entire economy at different price levels. |
| currency appreciation | An increase in the value of a country's currency relative to other currencies, making exports more expensive and imports cheaper. |
| currency depreciation | A decrease in the value of a country's currency relative to other currencies, making exports cheaper and imports more expensive. |
| exchange rate | The price of one currency expressed in terms of another currency in the foreign exchange market. |
| exports | Goods and services produced domestically and sold to foreign countries. |
| flexible exchange market | A foreign exchange market where the equilibrium exchange rate is determined freely by the interaction of supply and demand without government intervention. |
| imports | Goods and services produced in foreign countries and purchased domestically. |
| net exports | The difference between a country's total exports and total imports; a component of aggregate demand. |
| Term | Definition |
|---|---|
| domestic assets | Financial investments and property located within a country's borders. |
| financial capital flows | The movement of money and investment funds across countries in response to differences in returns and interest rates. |
| foreign assets | Financial investments and property located outside a country's borders. |
| foreign exchange market | The global market where currencies are traded and exchange rates are determined by the supply and demand for different currencies. |
| loanable funds market | The market where savers supply funds available for borrowing and borrowers demand funds, with the real interest rate serving as the price. |
| net capital inflow | The net flow of foreign investment into a country, representing the difference between foreign investment in the domestic economy and domestic investment abroad. |
| open economy | An economy that engages in international trade and allows the free flow of goods, services, and financial capital across borders. |
| real interest rate | The interest rate adjusted for inflation, reflecting the true purchasing power gained or lost from lending or borrowing. |
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