Macro Ch 13, 14, 15, 16

Aggregate demand and aggregate supply model

A model that explains short-run fluctuations in real GDP and the price level

Aggregate demand curve

A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government

Short-run aggregate supply curve

A curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms

Monetary policy

The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives

Fiscal policy

Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives

Long-run aggregate supply curve

A curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied

Menu costs

The costs to firms of changing prices

Supply shock

An unexpected event that causes the short-run aggregate supply curve to shift


A combination of inflation and recession, usually resulting from a supply shock


Assets that people are generally willing to accept in exchange for goods and services or for payment of debts


Anything of value owned by a person or a firm

Commodity money

A good used as money that also has value independent of its use as money

Federal Reserve

The central bank of the United States

Fiat money

Money, such as paper currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money


The narrowest definition of the money supply: The sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks


A broader definition of the money supply: It includes M1 plus savings account balances, small-denomination time deposits, balances in money market deposit accounts in banks, and non-institutional money market fund shares


Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve

Required reserves

Reserves that a bank is legally required to hold, based on its checking account deposits

Required reserve ratio

The minimum fraction of deposits banks are required by law to keep as reserves

Excess reserves

Reserves that banks hold over and above the legal requirement

Simple deposit multiplier

The ratio of the amount of deposits created by banks to the amount of new reserves

Fractional reserve banking system

A banking system in which banks keep less than 100 percent of deposits as reserves

Bank run

A situation in which many depositors simultaneously decide to withdraw money from a bank

Bank panic

A situation in which many banks experience runs at the same time

Discount loans

Loans the Federal Reserve makes to banks

Discount rate

The interest rate the Federal Reserve charges on discount loans

Federal Open Market Committee

The Federal Reserve committee responsible for open market operations and managing the money supply in the United States

Open market operations

The buying and selling of Treasury securities by the Federal Reserve in order to control the money supply


A financial asset, such as a stock or a bond, that can be bought and sold in a financial market


The process of transforming loans or other financial assets into securities

Velocity of money

The average number of times each dollar in the money supply is used to purchase goods and services included in GDP

Quantity theory of money

A theory about the connection between money and prices that assumes that the velocity of money is constant

Federal funds rate

The interest rate banks charge each other for overnight loans

Expansionary monetary policy

The Federal Reserve's decreasing interest rates to increase real GDP

Contractionary monetary policy

The Federal Reserve's increasing interest rates to reduce inflation

Taylor rule

A rule developed by John Taylor that links the Fed's target for the federal funds rate to economic variables

Inflation targeting

Conducting monetary policy so as to commit the central bank to achieving a publicly announced level of inflation

Automatic stabilizers

Government spending and taxes that automatically increase or decrease along with the business cycle

Multiplier effect

The series of induced increased in consumption spending that results from an initial increase in autonomous expenditures

Crowding out

A decline in private expenditures as a result of an increase in government purchases

Budget deficit

The situation in which the government's expenditures are greater than its tax revenue

Budget surplus

The situation in which the government's expenditures are less than its tax revenue

Cyclically adjusted budget deficit or surplus

The deficit or surplus in the federal government's budget if the economy were at potential GDP

Tax wedge

The difference between the pretax and posttax return to an economic activity