32  Glossary

Frictional unemployment. Short-run job/skill matching. People between jobs.

Structural unemployment. Changes in the structure of the economy. Whole industries decline.

Cyclical unemployment. From recessions. Disappears in expansions.

Natural rate. Frictional + structural. Textbook value \approx 4\%. The level consistent with full employment and no accelerating inflation.

Discouraged worker. Not in the labor force. Doesn’t show up in u.

MPC. \Delta C / \Delta Y_d. Slope of the consumption function.

APC. C / Y_d.

Subsistence consumption \overline{C_0}. Consumption when Y_d = 0. Vertical intercept of C.

Autonomous (exogenous). Does not depend on Y. In our model: \overline{I}, \overline{G}, \overline{C_0}, \overline{T}, \overline{X}, \overline{M}.

Multiplier K_X. \Delta Y^* / \Delta\overline{X}. Magnitude depends only on c.

M1. Currency held by public + checking + travelers’ checks + NOW accounts. Stock measure.

M2. M1 + savings + small time deposits + money market mutual funds + near-monies.

Required reserve ratio (rrr). Fraction of demand deposits banks must hold as reserves.

Discount rate. Rate at which the Fed lends to commercial banks.

Open Market Operations (OMO). Fed buys or sells government securities. The most-used tool.

Money multiplier K_S. 1/rrr. Dollars of M^S per dollar of new reserves (assuming no leakage).

Liquidity. Ease of converting an asset to cash without losing value.

Commodity money. Has intrinsic value (gold).

Fiat money. Intrinsically worthless. Value comes from government decree.

Legal tender. Government requires acceptance for settlement of debts.

Currency debasement. Value of money falls when supply rises rapidly.

Discretionary fiscal policy. Deliberate changes in \overline{G} and \overline{T} to affect Y^*.

Recessionary gap. Y^* < Y^{FE}.

Inflationary gap. Y^* > Y^{FE}.

Federal surplus / deficit. T - G. Flow.

Federal debt. Cumulative deficits over time. Stock.

Privately held federal debt. Portion held by non-government entities.

Foreign exchange. All currencies other than the domestic one.

Balance of payments. Record of all international transactions in goods, services, and assets.

Current account. Net exports + net investment income from abroad + net transfers from abroad.

Capital account. Net change in asset positions. U.S. buying foreign assets is a debit. Foreigners buying U.S. assets is a credit.

Trade deficit / surplus. EX - IM negative / positive.

Floating ER. Market-determined.

Fixed ER. Pegged by central bank intervention.

PPP. Exchange rate equals ratio of price levels.

J-curve. After a depreciation, the trade balance gets worse first, then better.

Trade feedback effect. One country’s growth raises imports, which become foreign exports, which boost foreign Y, which feeds back as more demand for the original country’s exports.

Price feedback effect. Inflation in one country raises import prices in other countries, transmitting inflation.

Beggar-thy-neighbor. Trying to boost own Y by exporting more and importing less. Hurts trading partners. Triggers retaliation.

Trilemma. A country can choose at most two of: free capital flow, fixed exchange rate, independent monetary policy.