The equity concept that people with larger incomes (or more consumption
or more wealth) should be taxed at a higher rate because their
ability to pay is presumably greater. The concept is subjective
and fails to reveal how much higher the rate of taxation should
be as income increases.
Deficits that reflect planned increases in government spending or
reductions in taxes designed to generate a budget deficit.
The view that deliberate changes in monetary and fiscal policy can be
used to inject demand stimulus during a recession and apply
restraint during an inflationary boom and thereby minimize
economic inability.
The hypothesis that economic decision makers base their future
expectations on actual outcomes observed during recent periods. For example, according to this view, the rate
of inflation actually experienced during the last two or three
years would be the major determinant of the
expected rate of inflation for next year.
The time period between when the need for a policy change is recognized
and when the policy is actually administered.
A downward sloping curve indicating an inverse relationship between the price level and the quantity of
goods and services that households, business firms, governments
and foreigners (net exports) are willing to purchase during a
period.
A curve indicating the relationship between the price level and quantity
of goods supplied by producers. In the short-run, it is
probably an upward sloping curve, but in the long-run
most economists believe the aggregate supply curve is vertical
(or nearly so).
A change that is foreseen by decision makers, allowing them time to
adjust.
An increase in the general level of prices that is expected by economic
decision-makers. Past experience and current conditions are the
major determinants of an individual's expectations with regard
to future price changes.
Built-in features that tend automatically to promote a budget deficit
during a recession and a budget surplus during an inflationary
boom, even without a change in policy.
A production technique that reduces the amount of labor required to
produce a good or service. It is beneficial to adopt the new
labor-saving technology only if it reduces the cost of
production.
Expenditures that do not vary with the level of income. They are
determined by factors (such as business expectations and
economic policy) that are outside the basic income
expenditure model.
A situation in which current government revenue from taxes, fees, and
other sources is just equal to current expenditures.
A situation in which total government : spending exceeds total government
revenue during : a specific time period, usually one year.
A situation in which total government spending is less than total
government revenue during a time period, usually a year.
Fluctuations in the general level of economic activity as measured by
such variables as the rate of unemployment and changes in real
GNP.
Economists from Adam Smith to the time of Keynes who focused their
analyses on economic efficiency and production. With regard to
business instability they thought market prices would adjust
quickly in a manner that would guide an economy out of a
recession back to full employment.
Financial institutions that offer a wide range of services (for example,
checking accounts, savings accounts, and extension of loans) to
their customers. Commercial banks are owned by stockholders and
seek to operate at a profit.
An indicator of the general level of prices. It attempts to compare the
cost of purchasing the market basket bought by a typical
consumer during a specific period with the cost of purchasing
the same market basket during an earlier period.
Household spending on consumer goods and services during the
current period. Consumption is a flow concept.
A fundamental relationship between disposable income
and consumption. As disposable income increases, current
consumption expenditures
will rise, but by a smaller amount than the increase in income.
A market in which the costs of entry and exit are low, so that a firm
risks little by entering. Efficient production and zero economic
profits should prevail in a contestable market. A market can be
contestable even if capital requirements are high.
A policy that tends to move the economy in an opposite direction from the
forces of the business cycle. Such a policy would stimulate
demand during the contraction phase of the business cycle and
restrain demand during the expansionary phase.
Financial cooperative organizations of individuals with a common
affiliation (such as an employer or labor union). They accept
deposits, including checkable deposits, pay interest (or
dividends) on them
out of earnings, and
channel funds primarily into
loans to members.
A reduction in private spending as a result of high
interest rates generated by
budget deficits that are financed by borrowing in the
private loanable funds market.
Unemployment due to recessionary business conditions and inadequate aggregate demand for labor.
A net loss associated with the forgoing of an economic action. The loss
does not lead to an offsetting gain for other participants. It
thus reflects economic inefficiency.
Non interest-earning deposits in a bank that either can be withdrawn or
made payable on demand to a third party via check. In essence,
they are "checkbook money" because they permit trans
actions to be paid for by check rather than by currency.
At any given interest rate, the amount of wealth that
people desire to hold in the form of money balances; that
is, cash and checking account deposits. The quantity demanded is
inversely related to the interest rate.
The multiple by which an increase (decrease) in reserves will increase
(decrease) the money supply. It is inversely related to the
required reserve ratio.
A prolonged and very severe recession.
The interest rate the Federal Reserve charges banking institutions for
borrowing funds.
Persons who have give for
employment because they believe additional job search would be
fruitless. Since they are not currently searching for work, they
are not counted among the unemployed.
The income available to individuals after personal taxes. It can either
be spent on consumption or saved.
MY = PQ , where M is the money supply, Y is the velocity of money, P is
the price level, and Q is the quantity of goods and services
produced.
A contractual agreement that periodically and automatically adjusts money
wage rates upward as the price level rises. They are some times
referred to as cost of-living adjustments or COLAs.
Deposits denominated in U. S. dollars at banks and other financial
institutions outside the United States. Although this name
originated because of the large amounts of such deposits held at
banks in Western Europe, similar deposits in other parts of the
world are also called Euro dollars.
A burden of taxation over and above the burden associated with the
transfer of revenues to the government. An excess burden usually
reflects losses that occur when beneficial activities are
forgone because they are taxed.
Actual reserves that exceed the legal requirement.
Situation in which the actual money balances of individuals and business
firms are in excess of their desired level. Thus, decision-
makers will increase their spending on other assets and goods
until they reduce their actual balances to the desired level.
An increase in government expenditures and/or a reduction in tax rates
such that the expected size of the budget deficit expands.
An acceleration in the growth rate of the money supply.
Goods and services produced domestically but sold to foreigners.
A loanable funds market in which banks seeking additional reserves borrow
short-term (generally for seven days or less) funds from banks
with excess reserves. The interest rate in this market is called
the federal funds rate.
The central bank of the United States; it carries out banking regulatory
policies and is responsible for the conduct of monetary policy.
Money that has little intrinsic value; neither is it backed by or
convertible to a commodity of value.
Goods and services purchased by their ultimate users. Fiscal Policy: The use of government taxation and
expenditure policies for the purpose of achieving macroeconomic goals.
A system that enables banks to keep less than 100 percent reserves
against their deposits. Required reserves are a fraction of
deposits.
Unemployment due to constant changes in the economy that prevent
qualified unemployed workers from being immediately matched up
with existing job openings. It results from lack of complete
information on the part of both job seekers and employers and
from the amount of unemployed time spent by job seekers in job
searches (pursuit of costly information).
The level of employment that results from the efficient use of the
civilian labor force after allowance is made for the normal
(natural) rate of unemployment due to dynamic changes and the
structural conditions of the economy. For the United States,
full employment is thought to exist when between 94 and 95
percent of the labor force is employed.
A price index that reveals the cost of purchasing the items
included in `GNP during the period relative to the cost
of purchasing these same items during a base year (currently,
1982). Since the base year
is assigned a value of 100, as the `GNP deflator takes on values
greater than 100, it indicates that prices have risen.
A highly aggregate market encompassing all final user goods and services
during a period. The market counts all items that enter into
GNP. Thus, real output in this market is equal to real GNP.
The central planning agency in the Soviet Union.
Current expenditures on goods and services provided
by federal, state, and local governments; it excludes
transfer payments.
The total market value of all "final product" goods and
services produced during a - specific period, usually a year.
A lump-sum tax levied on all individuals, regardless of their income,
consumption, wealth, or other indicators of economic well-being.
The time period between when a policy change is impLemented and when the
change begins to exert its primary effects.
Goods and services produced by foreigners but purchased by domestic
consumers, investors, and governments.
An index of economic variables that historically has tended to turn down
prior to the beginning of a recession
and turn up prior to the beginning of a business
expansion.
The automatic increasing of money values as the general level of prices
increases. Economic variables that are often indexed include
wage rates and tax brackets.
An index designed to measure the extent to which the economy's existing
plant and equipment capacity is
being used.
A rise in the general level of prices of goods and services. The
purchasing power of the monetary unit, such as the dollar,
declines when inflation is present.
A component of the money interest rate that reflects
compensation to the lender for the expected decrease, due
to inflation, in the purchasing power of the principal and
interest during the course of the loan. It is equal to the
expected rate of future inflation.
Goods purchased for resale or for use in producing another good or
service.
Changes in the stock of unsold goods and raw materials held during a
period.
The flow of expenditures on durable assets (fixed investment) plus the
addition to inventories (inventory investment) during a period.
These expenditures enhance our ability to provide consumer
benefits in the future.
The portion of the population 16 years of age and over who are either
employed or unemployed.
A curve illustrating the relationship between tax rates and tax revenues.
The curve reflects the fact that tax revenues are low for both
very high and very low tax rates.
A basic economic principle that states that as the consumption of a
commodity increases, the marginal utility derived from the
consuming more of the commodity (per unit of time) will
eventually decline. Marginal utility may decline even though
total utility continues to increase, albeit at a reduced rate.
An asset that can be easily and quickly converted to purchasing power
without loss of value
A general term used to describe the market arrangements that coordinate the borrowing and lending
decisions of business firms and households. Commercial banks,
savings and loan associations,
the stock and bond markets, and insurance companies are
important financial institutions in this
market.
Additional current consumption divided by additional current disposable
income.
Marginal Utility: The additional utility received by a person from the
consumption of an additional unit of a good within a given time
period.
A new measure of economic well-being that focuses on the consumption of
goods and services during a period. It differs from GNP in that
(a) the : estimated cost of' various economic "bads"
are deducted, (b) expenditures
on "regrettable necessities" are excluded, and
(c) the ; estimated benefits of leisure and various nonmarket
productive activities are included.
A group of economists who believe that (a) monetary instability is the
major cause of fluctuations in real GNP and (b) rapid growth of
the money supply is the major cause of inflation.
The deliberate control of the money supply and, in some cases, credit
conditions for the purpose of achieving macroeconomic goals.
The supply of currency, checking account funds, and traveler's checks.
These items are counted as money since they are used as
the means of payment for purchases.
The sum of (a) currency in circulation (including coins), (b) demand
deposits, (c) other checkable deposits of depository institutions, and (d) traveler's checks.
Equal to M- 1, plus (a) savings and time deposits (accounts of less than
$ 100,000) of all depository institutions, (b)
money market mutual fund shares, (c) money market deposit
accounts, (d) overnight
loans from customers to commercial banks, and (e) overnight
Eurodollar deposits held by U. S. residents.
Equal to M-2, plus (a) time deposits (accounts of more than $ 100,000) at
all depository ; institutions and (b) longer' term (more than
overnight) loans of customers to commercial banks and savings and loan associations.
The ratio of the change in equilibrium output to the independent change
in investment, consumption, or government spending that brings
about that change. Numerically, the multiplier is equal to 1 /(
1 -MPC) when the price level is constant.
The concept that an induced increase in consumption, investment, or
government expenditures leads to additional income and
consumption spending by secondary parties and therefore expands
total spending by a
larger amount than the initial increase in expenditures.
Financial institutions that accept deposits in exchange
for interest payments. Historically, home mortgages have
constituted their primary interest-earning assets. Under recent
banking legislation, these banks, too, are authorized to offer
interest- bearing checkable accounts.
The total income payments to owners of human (labor) and physical capital
during a period. It is also equal to NNP minus indirect business
taxes.
The long-run average of unemployment due to frictional and structural
conditions of labor markets. This rate is affected both by
dynamic change and by public policy: It is sustainable in the
future.
Gross national product minus a depreciation allowance for the wearing out
of machines and buildings during the period.
A tax that does not (a) distort consumer buying patterns or producer
production methods or (b) induce individuals to engage in
tax-avoidance activities. There will be no excess burden if a
tax is neutral.
Modern economists who believe there are strong forces pushing a market
economy toward full employment equilibrium and
that macroeconomic policy is an ineffective tool with
which to reduce economic instability.
GNP expressed at current prices. It is often called money GNP.
The value of economic variables such as GNP and personal consumption
expressed in current prices. A general increase in prices will
cause nominal values to rise even if there is no real change in
the variable.
The maintenance of the same monetary and fiscal policy-that is, no change
in money growth, tax rates or expenditures-during all phases of
the business cycle.
Time deposits owned by businesses or corporations.
The buying and selling of U.S. government securities (national debt) by
the Federal Reserve.
Deficits that merely reflect the decline in economic activity during a
recession.
The hypothesis that consumption depends on some measure of long run
expected (permanent) income rather than on current income.
The total income received by individuals that is available for
consumption, saving, and payment of personal taxes.
A curve that Illustrates the relationship between the rate of change in prices (or money wages) and the
rate of unemployment.
The proposition that any systematic policy will be rendered ineffective
once decision-makers figure out the policy pattern and adjust
their decision-making in light of its expected effects. The
theorem is a corollary of the theory of rational expectations.
The level of output that can be attained and sustained into the future,
given the size of the labor force, expected productivity of
labor, and natural rate of unemployment consistent with the
efficient operation of the labor market. For periods of time,
the actual output may differ from the economy's potential.
The total Federal Reserve credit outstanding. Most of this credit is in
the form of U.S. securities held by the Fed.
The average output produced per worker during a specific time period. It
is usually measured in terms of output per hour worked.
A tax that requires those with higher taxable incomes to pay a larger
percentage of their incomes to the government than those with
lower taxable incomes.
A tax for which individuals pay the same percentage of their income (or
other tax base) in taxes, regardless of income level.
A theory that hypothesizes that a change in the money supply will cause a
proportional change in the price level because velocity and real
output are unaffected by the quantity of money.
The number of persons 16 years of age and over who are
employed as a percentage of the total noninstitutional
population 16 years of age and over. One can calculate either
(a) a civilian rate of employment, in which only civilian
employees are included in the numerator, or (b) a total rate of
employment, in which both civilian and military employees are
included in the numerator.
The number of persons 16 years of age or over who are either employed or
actively seeking employment as a percentage of the total
noninstitutional population 16 years of age and over.
The percent of persons in the civilian labor force who are not employed.
Mathematically, it is equal to: Number of persons unemployed. x
1 00 number in civilian labor force.
This viewpoint expects individuals to weigh all available evidence,
including information concerning the probable effects of current
and future economic policy, when they formulate their
expectations about future economic events (such as the probable
future inflation rate).
GNP in current dollars deflated for changes in the prices of the items
included in GNP. Mathematically, real GNP2, is equal to nominal
GNP2, multiplied by (GNP Deflator 1/GNP Deflator). Thus, if
prices have risen between periods 1 and 2, the ratio of the GNP
deflator in period 1 to the deflator in period 2 will be less
than 1 This ratio will therefore
deflate the nominal GNP for the rising prices.
The measurement of a variable after it has been adjusted for changes in
the general level of prices.
A downturn in economic activity characterized by declining real GNP and
rising unemployment. In an effort to be more precise, many
economists define a recession as two consecutive quarters in
which there is a decline in real GNP.
The time period between when a policy change is needed
from a stabilization stand point and when the need is
recognized by policy-makers.
A tax that takes a smaller percentage of one's income as one's income
level increases. Thus, the proportion of income allocated to the
tax would be greater for the poor than for the rich.
A percentage of a specified liability category (for example, transaction
accounts) that banking institutions are required to hold as
reserves against that type of liability.
The minimum amount of reserves that a bank is required by law to keep on
hand to back up its deposits. Thus, if reserve requirements were
15 percent, banks would be required to keep $150,000 in
reserves against each $ 1 million of deposits. Reserves:
Vault cash plus deposits
of the bank with Federal Reserve Banks.
A reduction in government expenditures and/or an increase in tax rates
such that the expected size of the budget deficit declines (or
the budget surplus, increases).
A deceleration in the growth rate of the money supply.
Disposable income that is not spent on consumption. Saving is
a'"flow" concept. Thus, it is generally measured in
terms of an annual rate.
Financial institutions that accept deposits
in exchange for shares that pay dividends. Historically, these
funds have been channeled into residential mortgage loans. Under
recent banking legislation, S & Ls are now permitted to
offer checkable deposits
@NOW accounts) and extend a broad range of services similar to
those of commercial banks.
The view that production creates its own demand. Thus, there cannot be a
general over-supply because the total value of goods and
services produced (income) will always be avail able for
purchasing them.
A period during which an economy is experiencing both substantial
inflation and a slow growth in output.
Unemployment due to structural changes in the economy that eliminate some jobs while generating job
openings for which the unemployed workers are not well
qualified.
An unexpected event that temporarily either increases or decreases
aggregate supply.
Modern economists who believe that changes in marginal tax rates exert
important effects on aggregate supply.
The level of the activity that is taxed. For example, if an excise tax is
levied on each gallon of gasoline, the tax base is the
number of gallons of gasoline sold. Since higher tax
rates generally make the taxed activity less attractive, the
size of the tax base is inversely related to the rate at which
the activity is taxed.
The manner in which the burden of the tax is distributed among economic
units (consumers, employees, employers, and so on). The tax
burden does not always fall on those who pay the tax.
The per unit or percentage rate at which an economic activity is taxed.
Business enterprises that specialize in offering investment opportunities
designed to create a short-term accounting or
"paper" loss, which can then be deducted from
one's taxable income; at the same time, future "capital
gain" income is generated, which is taxable at a lower
rate.
Traditional savings institutions, such as savings and loan associations,
mutual savings banks, and credit unions.
Accounts including demand deposits, NOW accounts,
and other checkable deposits against which the account
holder is permitted to transfer funds for the purpose of making
payment to a third party.
Payments to individuals or institutions that are not linked to the
current supply of a good or service by the recipient.
A change that decision-makers could not reasonably foresee. Thus, choices
made prior to the event did not take the event into account.
An increase in the general level of prices that was not expected by most
decision makers. Thus, it catches them by surprise.
Unreported barter and cash transactions that take place outside recorded
market channels. Some are otherwise legal activities undertaken
to evade taxes. Others involve illegal activities such as
trafficking in drugs, prostitution, extortion, and similar
crimes.
The term used to describe a person not currently employed, who is either
(a) actively seeking employment or (b) waiting to begin or
return to a job.
The average number of times a dollar is used to purchase final goods and
services during a year. It is equal to GNP divided by the stock
of money.
The substitution of leisure time for work time when higher tax rates
reduce after-tax personal earnings. In effect, the reduction in
the take home (after-tax) portion of earnings reduces the
opportunity cost of leisure, and thereby induces individuals to
work less (and less intensively). Of course, lower tax rates
would exert the opposite effect.
A proposed scholarship providing subsidies to younger workers who
maintain jobs. Some scholarships would limit the subsidies to
employment that offered on-the-job training.
