Glossary ❮ 223the right toward full employment and lower the
unemployment rate.
expansionary monetary policy Increases in the
money supply meant to decrease real interest rates,
shift AD to the right toward full employment, and
reduce the unemployment rate.
expected rate of return The rate of profit the firm
anticipates receiving on investment expenditures.
exports Goods and services produced domestically
but sold abroad.
factors of production Inputs or resources that go
into the production function to produce goods and
services.
fiat money Paper and coin money with no intrinsic
value but used to make transactions because the
government declares it to be legal tender.
final goods Goods that are ready for their final use
by consumers and firms.
financial account See capital account.
the firm An organization that employs factors of
production to produce a good or service that it
hopes to profitably sell.
fiscal policy Deliberate changes in government
spending and net tax collection to affect economic
output, unemployment, and the price level.
foreign sector substitution effect The process of
domestic consumers looking for foreign goods
when the domestic price level rises, thus reducing
the quantity of domestic output consumed.
fractional reserve banking A system in which only
a fraction of the total money deposited in banks is
held in reserve.
full employment Exists when the economy is expe-
riencing no cyclical unemployment.
functions of money Money serves as a medium of
exchange, a unit of account, and a store of value.
future value If r is the current interest rate, the
future value of $1 invested today for a period of
one year is $1 × (1 + r).
GDP price deflator The price index that measures
the average price level of goods and services that
make up GDP.
gross domestic product (GDP) The market value
of the final goods and services produced within a
nation in a given period of time.
human capital The amount of knowledge and skills
that labor can apply to the work that they do.
imports Goods produced abroad but consumed
domestically.income effect Due to a higher price, the change
in quantity demanded that results from a change in
the consumer’s purchasing power (or real income).
inferior goods A good for which demand decreases
with an increase in consumer income.
inflation An increase in the overall price level.
inflation rate The percentage change in the price
level from one year to the next.
inflationary gap The amount by which equilibrium
real GDP exceeds full employment GDP.
interest rate effect The process of reduced domes-
tic consumption due to a higher price level causing
an increase in the real interest rate.
intermediate goods Goods that require further mod-
ification before they are ready for their final use.
investment demand The negative relationship
between the real interest rate and the cumulative
dollars invested.
investment spending Spending on physical capital,
inventories, and new construction.
investment tax credit A reduction in taxes for firms
that invest in new capital like a factory or piece of
equipment.
Keynesian school A macroeconomic model that
believes the economy is unstable and does not
naturally move to full employment in the long
run.
labor force The sum of all individuals 16 years and
older who are either currently employed (E) or
unemployed (U). LF = E + U.
law of comparative advantage Nations can mutu-
ally benefit from trade so long as the relative pro-
duction costs differ.
law of demand All else equal, when the price of a
good rises, the quantity demanded of that good
falls.
law of diminishing marginal returns As succes-
sive units of a variable input are added to a fixed
input, beyond some point the marginal product
declines.
law of increasing costs As more of a good is pro-
duced, the greater is its opportunity (or marginal)
cost.
law of increasing marginal cost As a producer
produces more of a good, the marginal cost rises.
This is very similar to the idea of increasing oppor-
tunity costs in Chapter 5.
law of supply All else equal, when the price of a
good rises, the quantity supplied of that good rises.15_AP Macroeconomics_2018_APPx_p215-238.indd 223 30/04/18 4:30 PM