Froyen, R.T., Macroeconomics: Theories & Polices, 5th Edition, Prentice Hall, Upper Saddle River, New Jersey, 1996, pp. 547-553



The accelerator model is a model of business investment which in its simplest form relates the level of investment to the rate of change in output.  More complex forms take account of costs of adjustment and borrowing costs.

Aggregate demand is the sum of the demands for current output by each of the buying sectors of the economy: households, businesses, the government, and foreign purchasers of exports.

The aggregate demand curve measures the demand for total output at each value of the aggregate price level.

The aggregate supply curve is the macroeconomic analog to the individual market supply curve, which shows the output forthcoming at each level of product price.  The aggregate supply curve shows the total output firms will supply at each value of the aggregate price level.

Automatic stabilizers are changes in taxes and government transfer payments that occur when the level of income changes.  They help stabilize the economy.

The autonomous expenditure multiplier gives the change in equilibrium output per unit change in autonomous expenditures (e.g., government spending).

Autonomous expenditures are expenditures that are largely determined by factors other than current income.



The balanced-budget multiplier gives the change in equilibrium output that results from a one-unit increase or decrease in both taxes and government spending.

The Board of Governors of the Federal Reserve is composed of seven members (governors) appointed by the president of the United States with the advice and consent of the Senate for a term of 14 years.  One member of the board is appointed chairman.  The Bretton Woods system was a pegged exchange rate system set up at the end of World War II.



The Cambridge approach is a version of the quantity theory of money that focuses on the demand for money (Md = kPy).

The capital account in the balance of payments is a record of purchases of U.S. assets by foreign residents (capital inflows) and purchases of foreign assets by U.S. residents (capital outflows).

Capital formation is growth in the stock of plant and equipment.

A capital gain is the increase in the market value of any asset above the price originally paid.  The capital gain is realized when the asset is actually sold.

Capital goods are capital resources like factories, machinery, and railroads used to produce other goods.

A capital loss is the decrease in the market value of any asset below the price originally paid.

Constant returns to scale means that increasing all inputs by a certain proportion (e.g., 100 percent) will cause output to rise by the same proportion (e.g., 100 percent).

Consumption is the household sector’s demand for output for current use.  Consumption expenditures consist of purchases of durable goods (e.g., autos and televisions), nondurable goods (e.g., food and newspapers), and services (e.g., haircuts and taxi rides).

The consumption function is the Keynesian relationship between income and consumption.

Corporate bonds are formal IOUs that require the corporation to pay a fixed sum of money (interest payment) annually until maturity and then, at maturity, a fixed sum of money to repay the initial amount borrowed (principal).

The consumer price index (CPI) measures the retail prices of a fixed “market basket” of several thousand goods and services purchased by households.

The current account in the U.S. balance of payments is a record of U.S. merchandise exports and imports as well as trade in services and foreign transfer payments.

The cyclical deficit is the portion of the federal deficit that results from the economy being at a low level of economic activity.

Cyclical unemployment results from fluctuations in the level of economic activity and consequent fluctuations in industry demand for workers.



The deposit multiplier gives the increase in bank deposits per unit increase in bank reserves.

Depository institutions are financial intermediaries whose main liabilities are deposits.  These depository institutions include commercial banks, savings and loan associations, mutual savings banks, and credit unions.

Depreciation is the portion of the capital stock that wears out each year.



Economies of scale are present when a doubling of all inputs results in output more than doubling.

The effective tax rate is the taxpayer’s tax bill divided by her or his total income.

In efficiency wage models the productivity of labor depends on the real wage workers are paid. In such models, the real wage is set to maximize the efficiency units of labor per dol­lar of expenditure, not to clear the labor market.

Elasticity measures the percentage change in one variable per 1 percent change in another variable, for example, the elasticity of money demand with respect to the interest rate.

An exchange rate is the value of one country’s currency in terms of foreign currencies.  An exchange rate system is a set of rules organizing the determination of exchange rates among currencies.



Factors of production are labor, land, capital, and entrepreneurship.

The federal funds rate is the rate at which banks make loans to one another.

The Federal Reserve System (Federal Reserve for short) is composed of 12 regional Fed­eral Reserve banks and the Board of Governors located in Washington.

Financial intermediaries are institutions that accept funds from savers and make loans to ultimate borrowers (e.g., firms).

Fiscal stabilization policy is the use of government spending and tax policies to affect the level of economic activity.

Frictional unemployment is unemployment due to the time workers spend between jobs and to the time entrants or reentrants to the labor force need to find jobs.



Government purchases of goods and services are the part of current output that goes to the government sector - the federal government as well as state and local governments.  Government spending refers to government outlays for purchases, transfer payments, and subsidies.

The Gramm-Rudman Act mandated a move to a balanced budget in steps over 5 years, by automatic spending cuts if Congress failed to balance the budget by legislation.  

Gross Domestic Product (GDP) is a measure of all currently produced final goods and services.

Gross National Product (GNP) is, like gross domestic product, a measure of aggregate national production.  There are two differences between the two measures, both of which concern foreign transactions.  GNP includes foreign earnings of U.S. corporations and earnings of U.S. residents working overseas; GDP does not include these items.  Conversely, GDP includes earnings from current production in the United States that accrue to foreign residents and foreign-owned firms, while GNP excludes these items.



A hyperinflation is a period when the price level explodes.  In the worst hyperinflation, inflation rates reach several thousand percent per month.

Hysteresis is the property that, when a variable is shocked away from an initial value, it shows no tendency to return even when the shock is over.  Persistently high unemployment rates in many European countries have led economists to argue that unemployment exhibits hysteresis.

Human capital is the accumulation of investments in schooling, training, and health that raises the productive capacity of people.



The implicit Gross National Product deflator is an index of the prices of goods and services included in Gross National Product.

Indirect business taxes are general sales and excise taxes.

Induced expenditures are expenditures that are determined primarily by current income.

Insider—Outsider models provide one explanation of hysteresis in unemployment.  Insiders (e.g., union members) are the only group that affects the real wage bargain.  Outsiders (e.g., those who want jobs) do not.  Recessions cause insiders to become outsiders.  After the recession, with fewer insiders, the real wage rises and unemployment persists.

Intermediate targeting on a monetary aggregate is a monetary policy strategy that aims at hitting money growth targets, with the ultimate goal of controlling the level of economic activity.

Investment is the part of Gross National Product purchased by the business sector plus residential construction.



Labor comprises the physical energy, manual skill, and mental ability that humans apply to the production of goods and services.

Legal reserve requirements specify that banks must hold a certain percentage (fraction) of deposits either in the form of vault cash (currency) or as deposits at regional Federal Reserve banks.  They are what are called fractional reserve requirements.  

The life cycle hypothesis about consumption asserts that saving and consumption decisions of households reflect a plan for an optimal consumption pattern over their lifetime, subject to the constraint of their resources.



Ml is the narrowest of the money supply measures in the United States.  It consists of currency plus checkable deposits.  Two other measures, M2 and M3, are broader.  They include all the components of Ml plus some additional bank deposits that have no or only limited provisions for checks.

A managed float for a country’s exchange rate is a system in which, at some times, the exchange rate is allowed to respond to market forces while at other times the central bank intervenes to influence the exchange rate.

Marginal cost is the extra, or additional, cost of producing one more unit of output.

The marginal product of an input is the addition to total output due to the addition of an extra unit of that input (the quantity of other inputs being held constant).

The marginal propensity to consume (MPC) is the increase in consumption per unit increase in disposable income.

The marginal propensity to save (MPS) is the increase in saving per unit increase in dis­posable income.

Marginal revenue is the added revenue associated with the sale of one more unit of output.

The marginal revenue product (MRP) of any resource input is the extra revenue the firm gains by using one more unit of the input, holding other inputs constant.

The marginal tax rate is the rate paid on each additional dollar earned from an activity.

The marginal utility of a good is the additional satisfaction a consumer derives from consuming one additional unit of that good.

Menu costs refer to any type of cost that a firm incurs if it changes its product price.

The merchandise trade balance measures exports minus imports in the U.S. balance of payments.

The monetary base is equal to currency held by the public plus bank reserves.

Monetary policy is the central bank’s use of control of the money supply and interest rates to influence the level of economic activity.

Money is whatever is commonly accepted as payment in exchange for goods and services (and payment of debts and taxes).

The money multiplier gives the increase in the money supply per unit increase in the monetary base.



National income is the sum of the earnings of all factors of production that come from current production.

Natural rates of output, employment, and therefore unemployment, in the monetarist model are determined by real supply-side factors: the capital stock, the size of the labor force, and the level of techno1ogy.  In our simple model, the natural rates of output, employment, and unemployment are the classical equilibrium levels of these variables (unemployment being confined to frictional and structural forms).

The new classical policy ineffectiveness proposition asserts that systematic monetary and fiscal policy actions that change aggregate demand will not affect output and employment even in the short run.

Nominal (or money) Gross National Product is gross national product measured in cur­rent dollars.



Oligopoly is closer to monopoly than to perfect competition because it is typified by few firms (as few as two or three) and by moderately difficult entry.  In product type, oligopoly markets may have either standardized or differentiated products.

The open market is the market of dealers in government securities in New York City.

The Open Market Committee is composed of 12 voting members: the 7 members of the Board of Governors and 5 of the presidents of regional Federal Reserve banks.  Presidents of the regional banks serve on a rotating basis, with the exception of the president of the Federal Reserve Bank of New York, who is vice chairman and a permanent voting member of the committee.

Open-market operations are purchases and sales of government securities in the open market by the Federal Reserve. Open-market operations are the primary tool for control of the monetary base.

The opportunity cost of an action is the value of the best foregone alternative.



The partisan theory views macroeconomic policy outcomes as the result of ideologically motivated decisions by leaders of different political parties.  The parties represent constituencies with different preferences concerning macroeconomic variables.

Personal income is the national income accounts measure of the income received by persons from all sources.

The Phillips curve is the schedule showing the relationship between the unemployment and inflation rates.

Potential GNP (output) is the level that would be reached if productive resources (labor and capital) were being used at benchmark high levels.

A price index measures the aggregate price level relative to a chosen base year.

The producer price index measures the wholesale prices of approximately 3000 items.

A production function summarizes the relationship between total inputs and total out­puts assuming a given technology.

Public choice is the application to macroeconomic policymaking of the microeconomic theory of how decisions are made.



The quantity theory of money is the classical theory stating that the price level is proportional to the quantity of money.  In the monetarist version the quantity theory is a theory of nominal GNP.



Rational expectations are expectations formed on the basis of all available relevant information concerning the variable being predicted.  Moreover, economic agents are assumed to use available information intelligently; that is, they understand the relationships between the variables they observe and the variables they are trying to predict.

Real gross national product measures aggregate output in constant-valued dollars from a base year.

The real interest rate is the nominal interest rate minus the anticipated rate of price inflation.  

A recession is a period when economic activity declines significantly relative to potential output, but less severely than in a depression such as that of the 1930s.

The required reserve ratio is the percentage of deposits banks must hold as reserves.



Seigniorage revenues are the amount of real resources bought by the government with newly created money.

Sticky price models (or menu cost models) are those in which costs of changing prices prevent price adjustments when demand changes.  Consequently, output falls when, for example, there is a decline in demand.

The structural deficit is the part of the federal deficit that would exist even if the economy were at its potential level of output.

Structural unemployment, like frictional unemployment, originates in the dynamic nature of the product and job mix in the economy, but structural unemployment lasts longer.



Target zones for exchange rates are ranges within which policymakers try to maintain their currency’s value.  The target zones are jointly set by major industrialized nations.  

Technological change includes changes in technological knowledge (e.g., ways to employ robots in the production process) as well as new knowledge about how to organize businesses (managerial strategies).

The trade deficit is the excess of imports over exports.



The unemployment rate expresses the number of unemployed persons as a percentage of the labor force.



The velocity of money is the rate at which money turns over in Gross National Product transactions during a given period, that is, the average number of times each dollar is used in Gross National Product transactions.