Above full-employment equilibrium A situation in which macroeconomic equilibrium occurs at a level of real GDP above long-run aggregate supply.
Accelerator mechanism The mechanism linking the level of net investment to the change in output.
Aggregate demand The relationship between the quantity of real GDP demanded and the price level—either the aggregate demand schedule or the aggregate demand curve.
Aggregate expenditure Expenditure on final goods and services during a specified time period — the quantity of real GDP demanded at a given price level.
Aggregate expenditure curve A curve showing the relationship between aggregate planned expenditure and real GDP.
Aggregate income The payment made for the services of all the factors of production in the economy during a specified time period.
Aggregate planned expenditure The sum of planned consumer expenditure, investment, government expenditures on goods and services, and net exports.
Aggregate product The value of final goods and services produced during a specific time period.
Aggregate quantity of goods and services demanded The quantity of real GDP demanded — the total value (measured in constant dollars) of consumer expenditure, investment, government expenditures on goods and services, and net exports.
Aggregate quantity of goods and services supplied The quantity of real GDP supplied — the total value (measured in constant dollars) of all the goods and services produced in the economy.
Aggregate supply curve A graph of the quantity of real GDP supplied at each price level, holding constant all other influences on firms’ production plans.
Ak model A special case of endogenous growth model with contant returns.
Anticipated inflation A process in which the price level is the increasing at the rate forecasted by all the economic actors.
Appreciation of the dollar An increase in the number of units of foreign money that a dollar will buy.
Arbitrage The process of buying low and selling high.
Assets Items that are owned.
Autonomous consumer expenditure Consumer expenditure that is independent of the level of income.
Autonomous expenditure That part of aggregate expenditure that does not depend on real GDP.
Autonomous taxes Taxes that are independent of income.
Autonomous tax multiplier The ratio of change in real GDP to the change in autonomous taxes that caused it.
Average propensity to consume The ratio of consumer expenditure to disposable income.
Average propensity to save The ratio of saving to disposable income.
Balanced budget multiplier The ratio of the change in real GDP to the change in government expenditures that produced it, when that change in expenditure is financed by an equal change in autonomous taxes.
Balance sheet A statement about what someone owns and owes.
Bank reserves Deposits held by chartered banks at Bank of Canada, together with currency held in the vaults and tills of chartered banks.
Basic deficit The budget deficit excluding debt interest.
Budget constraint The limits to expenditure.
Business cycle Recurring fluctuations in the pace of economic expansion measured by deviations of real GDP from trend.
Capital The stock of buildings, plant and equipment, houses, consumer durable goods, and inventories.
Capital account An account that records the receipts from nonresidents and payments made to nonresidents arising from the issuing of new debt or the repayment of old debt.
Capital-intensive technique A technique that uses a large amount of capital and a small amount of labour.
Classical macroeconomics Macroeconomics based on the view that the economy always tends towards full employment.
Classical model A macroeconomic model that explains how real GDP and other variables are determined at full employment.
Closed economy model A model in which there are no international transactions between the domestic economy and the rest of the world.
COLA Cost Of Living Adjustment: A component of a wage agreement to change wage payments by amounts determined by the change in the Consumer Price Index-by changes in the cost of living.
Consumer expenditure The value of goods and services bought by households.
Consumer Price Index (CPI) A measure of the price level that is based on the cost of a particular “basket” of goods and services consumed by urban Canadian families.
Consumption function The relationship between consumer expenditure and disposable income.
Covered interest parity The equality of rates of return when no risk is taken — the investor covers the transaction by taking out a contract to buy or sell currencies on the forward market.
Crowding out The effect of an increase in government expenditures on investment.
Currency held by the public The notes and coins in general circulation (held by households and firms).
Current account An account that records the flows of goods and services and other current receipts and payments between residents of the domestic economy and residents of the rest of the world.
Cyclical unemployment Unemployment in excess of frictional, structural and seasonal unemployment.
Debt-GDP ratio The value of debt outstanding expressed as a percentage of GDP.
Demand curve for real money A curve that shows the quantity of real money demanded at a given real income as the interest rate varies.
Demand for labour The relationship between the quantity of labour employed and the real wage rate other things remaining the same.
Demand for money function The relationship between the quantity of real money demanded and the two factors on which it depends: real income and the interest rate.
Depreciation The decrease in the value of capital that results from its use or from the passage of time.
Depreciation of the dollar A decrease in the number of units of foreign money that one dollar can buy.
Desired reserves The reserves (cash in the bank’s vault and chartered bank deposits at the Bank of Canada) that chartered banks regard as necessary to conduct their business.
Devaluation A decrease in the value of a fixed exchange rate.
Diminishing returns The decreases in the marginal product of a factor of production as more of the factor is employed, other inputs held constant.
Direct controls Specific laws, rules, and regulations designed to modify the way people behave.
Discouraged workers People who have no jobs, are willing to work, and are available for work but have stopped searching for work because of their discouraging experience.
Discretionary macroeconomic policy A policy that reacts to the current state of the economy.
Disposable income Households’ income minus total taxes paid.
Dissaving Negative saving.
Dollar assets Securities such as bonds, stocks, Treasury bills, bank deposits, and loans denominated in Canadian dollars.
Domestic income The total income, including profit, paid for the services of factors of production used to produce goods and services in Canada in a year.
Dynamic effects The drawn-out effects that take place as households and firms respond to policy actions.
Econometric models Statistical descriptions of the economy that could be used to study the effects of alternative policies before they were implemented.
Effective exchange rate An exchange rate index that is a weighted average of the value of a unit of domestic money in terms of all other foreign currencies, where the weight on each foreign currency is equal to the proportion of the economy’s international trade undertaken in that currency.
Endogenous growth theory An approach to understanding economic growth that explains how choices influence technological change.
Endogenous variables Variables whose values are determined by a model.
Endowment The labour income that a household has to spend over its lifetime.
Equation of exchange The quantity of money multiplied by the velocity of circulation equals total expenditure.
Equilibrium expenditure A situation in which aggregate planned expenditure equals real GDP.
Eurodollars U.S. dollars deposited in foreign banks outside the United States (or foreign branches of U.S. banks)(Eurodollars today include bank deposits held in Europe denominated in a variety of currencies, including Canadian dollars).
European Monetary System An agreement among members of the European Union to promote exchange rate stability.
Excess reserves The reserves held by banks in excess of their desired reserves. That is, actual reserves minus desired reserves.
Exchange Rate Mechanism A system of fixed exchange rates between the currencies of some members of the European Monetary System.
Exogenous variables Variables whose values are determined outside a model.
Expectations-augmented Phillips curve A short-run Phillips curve the position of which depends on the expected inflation rate.
Expected inflation rate The forecasted inflation rate for some future period.
Exports The flow of money from the rest of the world in exchange for domestically produced goods and services.
External debt The debt owed by the private and government sectors of the economy to the rest of the world.
Externality A cost or benefit experienced by one economic agent that results from the actions of another agent or agents.
Federal deficit The deficit of the federal government.
Feedback policy A policy that reacts to the state of the economy.
Final goods and services Consumer goods and services bought by households; investment goods (plant, equipment, buildings, and inventories) bought by firms; goods and services by governments; and goods and services bought by foreigners (exports) minus the goods and services we buy from the rest of the world (imports).
Financial assets Paper claims by one person against another.
Financial innovation The development of new financial products such as credit cards, debit cards, interest bearing chequing accounts, and money market funds.
Fiscal policy Changes in government expenditures and taxes designed to influence the economy.
Fixed exchange rate regime A regime in which the central bank declares a central or par value for the exchange rate that it will act to maintain.
Fixed investment The purchase of new buildings, plant and capital, houses, consumer durable goods.
Fixed rule A prescription of behaviour that is the same regardless of the state of the economy.
Flexible exchange rate A foreign exchange rate whose value is determined by market forces.
Floating exchange rate A foreign exchange rate whose value is determined by market forces.
Flow A variable that measures a rate per unit of time.
Foreign exchange rate The number of units of foreign money that one unit of domestic money will buy.
Forward contract A contract entered into today to buy or sell an agreed quantity at an agreed future date and at an agreed price.
Forward exchange rate The price at which one currency is traded for another for delivery at a specified future date.
Frictional unemployment The unemployment that arises from the normal working of the labour market as people enter and leave the labour force and jobs are created and destroyed.
Full-employment equilibrium A situation in which macroeconomic equilibrium occurs at a point on the long-run aggregate supply curve.
GDP deflator A measure of the price level that is based on the prices of all the items that are included in GDP.
GDP gap When real GDP is less than long-run aggregate supply.
Golden rule The situation in which consumption per person is maximized in the steady state.
Gold exchange standard A monetary system in which national currencies are exchangeable into gold. Under the gold exchange standard, Canada kept its monetary policy in close harmony with the policies of other countries in a system of fixed exchange rates.
Government depositt shifting Shifting government funds between the Bank of Canada and the chartered banks.
Government expenditures multiplier The ratio of the change in real GDP to the change in government expenditures that caused it.
Government expenditures on goods and services Expenditures by the government on final goods and services.
Gross domestic product Total expenditure on final goods and services in a year in Canada.
Gross investment The amount of new capital purchased during a given time period including purchases to replace depreciated capital.
Gross national product Total expenditure in a year on goods and services produced by Canadians wherever in the world that activity takes place.
Human capital The present value of current and future labour income.
Hyperinflation An inflation rate in excess of 50 percent a month.
Impact effects The instantaneous effect of policy actions on indicators or targets.
Import function The relationship between the quantity of imports and real GDP.
Imports The flow of money to the rest of the world in exchange for foreign produced goods and services.
Income velocity of circulation GDP divided by the quantity of money.
Increasing returns A situation in which the marginal product of a factor of production increases as the quantity of the factor employed increases, other inputs held constant.
Induced consumer expenditure Consumer expenditure that varies with disposable income.
Induced taxes Taxes that vary with income.
Inflation rate The percentage change in the price level.
Inflation tax The tax that people implicity pay when rising prices reduce the real value of money and the government debt they hold.
Injection A flow into the circular flow of income and expenditure.
Interest rate parity The equality of rate of return on assets, independent of the currency in which they are denominated.
Intermediate transactions The purchase of goods and services by firms for use in later stages of the production of final goods and services.
International gold standard A monetary system in which most major countries fix the value of their currency in terms of gold and permit gold to freely enter and leave the country.
International monetary system A set of arrangements and institutions for governing the financial relations among countries.
Intertemporal budget constraint The limits of expenditure at each point in time and the links between spending, borrowing, and lending.
Inventory investment The purchase of items to add to inventories.
Inventory theory of demand for money A theory of the demand for money based on minimizing the cost of managing an inventory of money.
Investment The purchase of new buildings, plant and capital, houses, consumer durable goods, or inventories.
Investment demand The planned rate of purchase of new capital — the planned rate of investment.
Investment function The relationship between investment and the interest rate, holding all other influences on investment constant.
Investment multiplier The ratio of the change in real GDP to the change in investment that caused it.
IS curve The relationship between real GDP and the interest rate such that aggregate planned expenditure equals real GDP.
Keynesian macroeconomics Macroeconomics based on the view that the economy can get stuck a long way from full employment.
Labour force The number of people employed plus the number of people unemployed.
Labour-intensive technique A technique that uses a large amount of labour and a small amount of capital.
Leakage An outflow from the circular flow of income and expenditure.
Liabilities Items that are owed.
Life-cycle hypothesis The proposition that households smooth their consumption over their lifetimes.
Lifetime budget constraint The limits to a household’s consumption over its lifetime.
Liquidity constraint The maximum amount of current consumption that can be financed by borrowing against future labour income.
LM curve The relationship between the interest rate and real GDP such that the quantity of money demanded equals the quantity supplied.
Long-run aggregate supply The quantity of real GDP supplied when all wages and prices have adjusted so that each firm is producing its profit maximizing output and there is full employment.
Long-run consumption function The average relationship between consumer expenditure and per-sonal disposable income over several decades.
Long-run Phillips curve The relationship between inflation and the unemployment rate when inflation is fully anticipated.
Lucas aggregate supply curve A curve showing the maximum real GDP supplied at each price level when, given expected price level, the labour market is in equilibrium.
M1 Currency (Bank of Canada notes and coins) held by the public plus demand deposits at chartered banks.
M2+ M1 plus savings deposits and notice deposits at chartered banks plus deposits at trust and mortgage companies, credit unions and caisse populaires, and other financial institutions.
Macroeconomic equilibrium A situation in which the quantity of real GDP demanded equals the quantity of real GDP supplied.
Macroeconomic indicators Variables that provide information, on a frequent basis, about the current state and direction of the economy.
Macroeconomic model A description of how households, firms, governments, and foreigners make current economic decisions and how these decisions are coordinated in markets.
Macroeconomic policy instruments Variables manipulated by the government or the Bank of Canada to influence the macroeconomic policy targets.
Macroeconomic policy rule A macroeconomic policy that operates according to a fixed formula.
Macroeconomic policy targets The goals of macroeconomic policy: sustained income growth, low unemployment, mild fluctuations, and low inflation.
Macroeconomics The study of aggregate economic activity and, in particular, the study of real GDP growth, unemployment, and inflation.
Managed floating exchange rate An exchange rate that is manipulated by the central bank, but not necessarily held constant. Marginal product of capital The increase in real GDP per person resulting from a one-unit increase in capital per person.
Marginal product of labour The increase in output that results from employing one additional hour of labour.
Marginal propensity to consume The ratio of a change in consumer expenditure to a change in disposable income.
Marginal propensity to consume out of real GDP The fraction of each additional dollar of real GDP that households spend on goods and services.
Marginal propensity to import The change in imports resulting from a one-dollar increase in real GDP.
Marginal propensity to save The ratio of a change in saving to a change in disposable income.
Marginal rate of intertemporal substitution The amount of future consumption the household is willing to give up in order to have one additional unit of current consumption.
Marginal tax rate The fraction of an additional dollar of income paid out in taxes.
Marginal tax rate multiplier The ratio of the change in real GDP to the change in the marginal tax rate that caused it.
Market activity Work and job search.
Medium of exchange Anything that is acceptable in exchange for goods and services.
Monetary base The sum of bank reserves and currency held by the public.
Monetary policy Changes in interest rates and the quantity of money designed to influence the economy.
Monetary targeting A policy of announcing a target for the money supply growth rate and then attempting to deliver a growth rate inside the announced target range.
Money Anything that is generally acceptable as a medium of exchange.
Money multiplier The change in the money supply per one-dollar change in the monetary base.
Natural unemployment rate The unemployment rate when all the unemployment is frictional, structural, and seasonal and there is no cyclical unemployment.
Neoclassical growth model A model that determines real GDP per person, consumption and sav-ing per person, capital per person, and the economic growth rate.
Net export curve The relationship between net exports and real GDP, holding the real exchange rate constant.
Net exports function The relationship between net exports, real GDP, real GDP in the rest of the world, and the real exchange rate.
Net exports Exports minus imports.
Net foreign investment income The earnings of residents of the domestic economy on assets held in the rest of the world minus the earnings of foreigners on assets held in the domestic economy.
Net investment The change in the capital stock (grow investment minus depreciation) during a given time period.
Net worth Total assets minus total liabilities.
New growth theory An approach to understanding economics growth that explains how choices influence technological change.
Nominal exchange rate The number of units of a foreign currency that one unit of domestic currency will buy.
Nominal GDP The value of goods and services produced in a year when output is valued at current year prices.
Nominal GDP targeting A policy of targeting a growth path for nominal GDP.
Nonmarket activity Leisure and home production.
Nonresidential fixed investment The expenditure by firms on new plant, buildings, and equipment.
Official settlements account An account that records the net receipts and payments of gold and foreign currency resulting from current account and capital account transactions.
Official settlements balance The change in a country’s foreign exchange reserves less the change in its official borrowing.
Open economy model A model that takes into account linkages between the domestic economy and the rest of the world.
Open market operation The purchase or sale of government securities by the Bank of Canada in order to change the money base.
Output-inflation tradeoff The relationship between deviations of real GDP from full employ-ment and inflation from its expected level.
Overnight lending rate The interest rate paid by chartered banks when they borrow from each other and from other financial institutions.
Per capital production function The relationship between output per person and capital per person.
Permanent income The average income the household expects to receive over the rest of its life.
Permanent income hypothesis The proposition that consumer expenditure is proportional to permanent income.
Personal disposable income Personal income minus personal income tax payments.
Personal income National income plus transfer payments from government minus business retained profits.
Phillips curve A relationship between the inflation rate and the unemployment rate, holding constant the natural rate of unemployment and the expected inflation rate
Plaza Agreement An agreement among five major nations (United States, Japan, United Kingdom, France, and Germany) to bring national monetary policies into closer harmony, thereby reducing the amount of exchange rate volatility.
Policy ineffectiveness proposition The proposition that anticipated changes in monetary policy have no effect on real GDP or any other real variable.
Portfolio equilibrium A situation in which no reallocation of assets will increase the return on a portfolio for a given amount of risk.
Potential GDP Real GDP at full employment.
Precautionary theory of the demand for money A theory of the demand for money based on the idea that money, in part, is held as a kind of general insurance against an uncertain future.
Present value The amount of a sum of money that, if invested in the present, at the current interest rate, would accumulate to the future sum over a given number of years.
Propensity to hold money The ratio of the quantity of real money demanded to real income.
Purchasing power parity The equality of the value of money in all countries.
Quantity of dollar assets demanded The quantity of net financial assets denominated in Canadian dollars that people plan to hold at a given point in time.
Quantity of dollar assets supplied The quantity of net financial assets denominated in Canadian dollars available to be held at a point in time.
Quantity of labour supplied The amount of time allocated to work.
Quantity of money demanded The amount of money that people plan to hold on a given day in given circumstances.
Quantity theory of money The proposition that a change in the growth rate of the money supply brings an equal percentage change in the inflation rate.
Rate of return The net income received from using a piece of capital equipment expressed as a percentage of the equipment’s price.
Rational expectation A forecast about the future value of an economic variable made using all available information.
Rational expectaton of the price level The price level that is expected on the basis of all relavant information available at the time the expectation is formed.
Real asset A concrete, tangible object.
Real deficit The change in the real value of outstanding government debt.
Real exchange rate A measure of the price of domestic goods and services relative to the price of foreign goods and services.
Real GDP A measure of the quantity of the goods and services that can be bought with the income of all the individuals in the economy in a year. It is measured as the value of the goods and services produced in a year when output is valued in base-year prices.
Real money Money expressed in terms of the quantity of goods and services that it can buy. It is equal to the quantity of money divided by the price level.
Real wage rate The money wage rate divided by the price level—it is the real price or real cost of labour to firms.
Rental rate of capital The cost of using capital equipment, expressed in terms of dollars per hour. Alternative name to user cost of capital.
Replacement ratio The scale of unemployment benefits divided by the wage rate that a worker can use.
Residential fixed investment The expenditure by households and firms on new houses and apart-ments.
Revaluation An increase in the value of a fixed exchange rate.
Ricardian equivalence theorem The proposition that government debt and taxes are equivalent to each other and have no effect on interest rates.
Saving Household income minus consumer expenditure.
Saving function The relationship between saving and disposable income.
Seasonal Unemployment Unemployment that arises because the number of jobs available has decreased because of the season.
Short-run aggregate supply curve A graph of the quantity of real GDP supplied at each price level, holding constant the prices of factors of pro-duction and, in particular, the wage rate.
Short-run consumption function The relationship between consumer expenditure and personal disposable income in a particular year.
Short-run Phillips curve A Phillips curve drawn for a particular, given, expected inflation rate.
Short-run production function The relationship between the maximum attainable real GDP and the quantity of labour employed when all other influences on production remain the same.
Solow residual An estimate of the contribution of technological change to the change in output when inputs are held constant.
Speculative theory of demand for money A theory of the demand for money based on the idea that people hold the mixture of money and other assets that gives the best available combination of risk and return.
Spot exchange rate The exchange rate between two currencies for immediate delivery.
Stagflation A process of a rising price level and falling real GDP.
Steady state A situation in which the relevant variables are constant over time.
Stock A variable that is measured at a point in time.
Structural unemployment The unemployment rate that arises when changes in technology or international competition change the skills needed to perform jobs or change the location of jobs.
Target variables Variables that macroeconomic policy seeks to influence.
Taxes Total taxes paid minus transfer payments.
Tax function The relationship between taxes paid and income.
Tobin’s q The ratio of the stock market value of a firm to the price of the firm’s capital assets.
Total government deficit The deficit of the gov-ernment sector — federal, provincial, and local.
Transfer payments Payments of benefits and subsidies by the government.
Transitory income The difference between the current period’s actual income and the previous period’s permanent income.
Unanticipated inflation A process in which prices increase at a pace that has been incorrectly forecast to some degree.
Uncovered interest parity The equality of rates of return where the investor takes the risk — does not cover the transaction by taking out a for-ward contract.
Underground economy The part of the economy that engages in illegal activity.
Unemployed person A person who is able and willing to work and is available for work but does not have work.
Unemployment equilibrium A situation in which macroeconomic equilibrium occurs at a level of real GDP below long-run aggregate supply.
Unemployment rate The percentage of the labour force that is either out of work and seeking jobs or on temporay layoff. It is calculated as the number of unemployed people expressed as a percentage of the labour force.
Unilateral transfers Gifts made by residents of the domestic economy to foreigners minus gifts received from foreigners.
User cost of capital The cost of using capital equipment, expressed in terms of dollars per hour. Alternative name to rental rate of capital.
Value added The increase in the value of a product when factors of production are used at each stage in the production process.
Velocity of circulation The average number of times one dollar of money finances transactions in a given time period.
Wealth Total assets minus total liabilities.