Inflation rate: the rate of change of prices (as indicated by a price index)
calculated on a monthly or annual basis.
Purchasing Power: the amount of goods or services that can be purchased
with a unit of currency.
For example, if you had taken one dollar to a store in the 1950s, you
would have been able to buy a greater number of items than you
would today, indicating that you would have had a greater
purchasing power in the 1950s.
Fiscal Policy: determines the government’s budget.
Monetary Policy: government controls the economy.
Unconventional Monetary Policy: example loaning money to troubled
institutions and buying long term government debt that central banks use
in abnormal times to supplement conventional monetary policy.
Expenditures = Expenses, Costs, Fees
Government Budget Balance is the difference between revenues and
Government Budget Deficitwhen expenditures are higher than
Government Budget Surpluswhen revenues are higher than
Government Debt: the increase of debt over a particular year.
Aggregation: smaller projects are combined and treated as an
Fallacy of Composition: if something is true for a part, it is also
true for the whole.
**Structural Policy: government policies aimed at
Macroeconomic Policies: government actions designed to affect
the performance of the economy as a whole. Average Labor Productivity: output per employed worker.
Gross Domestic Product (GDP): value of the final goods and
services produced in a country during a given period.
Consumption: spending by households on goods or services, such
as food, clothing, and entertainment.
Final Goods or Services: consumed by the ultimate user; end
products of the production process counted part of GDP.
Intermediate Goods or Services: used in the production of goods
or services and therefore not part of GDP.
Value Added: the market value of a product minus the costs put
Private Sector Investment: process of investing in a commodity
that is not traded publicly.
Government Purchases: purchases by federal, provincial, and
municipal governments of final goods or services.
Labor Force: total number of employed and unemployed people
in the economy.
Discouraged Workers: people who say they want a job but have
made no effort in 4 weeks.
Net Investment: investment that adds to the total capital stock of
Net Exports: exports – imports
Real GDP: reflects the value of all goods and services produced in
a given year, expressed in base-year prices
Nominal GDP: reflects the value of all goods and services produced in a given year, expressed in current-year prices.
Gross National Product (GNP): GDP plus any income earned by
residents from overseas investments, minus income earned
within the domestic economy by overseas residents.
GDP Deflator: nominal divided by real GDP
Unemployment Rate: # of employed people divided by the labor
Participation Rate: % of the people in the labor force that are
employed or currently looking for work.
Employment Rate: % of working age population that are
Consumer Price Index: computes the cost of living for a country.
More direct than GDP.
Price Index: average price of a given good or service in a given
region over a given interval of time. Used to see how the prices
differ between time periods or geographical locations.
Rate of Inflation: the rate of change of prices (as indicated by a price index) calculated
on a monthly or annual basis.
Deflation: a situation in which the prices of most goods and services are falling over time
so that inflation is negative.
The nominal value of a good is its value in terms of money. The real value is its value in
terms of some other good, service, or bundle of goods.
◦ Nominal: That CD costs $18. Japan's science and technology spending is about 3
trillion yen per year.
Real: A year of college costs about the value of a Toyota Camry. Those tickets to see
Van Halen cost me three weeks' worth of food!
Deflating (a nominal quantity): dividing a nominal quantity by a price index (such as CPI) to express the quantity in real terms.
Real Wage: a wage paid to workers measured in terms of real purchasing power.
Inflation: increase in prices and decrease in purchasing power.
Indexing: prevents purchasing power of nominal quantity to decrease due to inflation.
Nominal Interest Rate: encountered in everyday life; the rate of interest before adjusting
Real Interest Rate: an interest rate that has been adjusted to remove the effects of
inflation. (Nominal Interest Rate – inflation rate)
The effects of inflation depends in part on whether inflation is anticipated or
Anticipated Inflation: When people/businesses can make accurate predictions of
inflation, they can take steps to protect themselves from its effects.
Unanticipated Inflation: When inflation is inconsistent from year to year, it becomes
difficult for individuals and businesses to correctly predict the rate of inflation in the
Fisher Effect: the tendency for nominal interest rates to be high when inflation is high,
and low when inflation is low. (Irving Fisher)
For example, if the nominal interest rate on a savings account is 4% and the
expected rate of inflation is 3%, then money in the savings account is really
growing at 1%. The smaller the real interest rate the longer it will take for savings
deposits to grow substantially when observed from a purchasing power
Relative Price: the price of a specific good or service in comparison to other goods or
Zero Inflation: when the price level stays roughly constant from one year to the
Stable Inflation: when the inflation rate stays roughly constant from one year to the
Accelerating Inflation: when the inflation rate rises from one year to the next.
Disinflation: when the inflation rate falls from one year to the next.
Low Inflation: inflation between 1% and 3% per year.
Moderate Inflation: inflation between 3% and 6% per year.
High Inflation: inflation greater than 6% per year. Hyperinflation: inflation greater than 500% per year.
Price Signal Distortion Hypothesis: the claim that any real amount of change in the price
level will make it difficult for people to interpret the extent to which price changes involve
relative price changes. (how a price change will affect other goods and services costs).
Downward Nominal Rigidity Hypothesis: the claim that low levels of inflation will reduce
efficiency because real wage cuts will then require nominal wage cuts.
Zero Bound on Nominal Interest Rates: The lowest percentage of owed principal that a
central bank can set.
In monetary policy, the use of a 0% nominal interest rate means that the central
bank can no longer reduce the interest rate to encourage economic growth.
As the interest rate approaches the zero bound, the effectiveness of monetary
policy is reduced as a macroeconomic tool.
A zero-bound interest rate typically refers to the process where, by gradual steps,
the interest rate approaches zero.
Recession: (contraction) a period in which the economy is growing at a rate below
Depression: severe recession.
Peak: the beginning of a recession, the high point of economic activity prior to a
Trough: the end of a recess, the low point of economic activity prior to a recovery.