224 ❯ Glossaryliability of a bank Anything owned by depositors or
lenders to the bank.
liquidity A measure of how easily an asset can be
converted to cash.
loanable funds market A hypothetical market where
borrowers (investors) demand more funds at a
lower real interest rate and lenders (savers) supply
more funds at a higher real interest rate.
long run A period of time long enough for the firm to
alter all production inputs, including the plant size.
long-run aggregate supply A vertical curve drawn
at full-employment real GDP. In the long run
it is believed that all prices and input costs will
adjust to any short-run shock, thus bringing the
economy back to long-run equilibrium.
M 1 The most liquid measure of money supply,
including cash, checking deposits, and traveler’s
checks.
M 2 M1 plus savings deposits, small time deposits,
and money market and mutual funds balances.
macroeconomic long run A period of time long
enough for input prices to have fully adjusted to
market forces, all input and output markets are in
equilibrium, and the economy is operating at full
employment (GDPf).
macroeconomic short run A period of time during
which the prices of goods and services are chang-
ing in their respective markets but the input prices
have not yet adjusted to those changes in the prod-
uct markets.
marginal The next unit, or increment of, an action.
marginal analysis Making decisions based upon
weighing the marginal benefits and costs of that
action. The rational decision maker chooses an
action if the MB ≥ MC.
marginal benefit (MB) The additional benefit
received from the consumption of the next unit of
a good or service.
marginal cost (MC) The additional cost of produc-
ing one more unit of output.
marginal propensity to consume (MPC) The change
in consumption caused by a change in disposable
income. The slope of the consumption function.
marginal propensity to save (MPS) The change in
saving caused by a change in disposable income.
The slope of the saving function.
marginal tax rate The rate paid on the last dollar
earned, calculated by taking the ratio of the change
in taxes divided by the change in income.market A group with buyers and sellers of a good
or service.
market basket A collection of goods and services
used to represent what is consumed in the econ-
omy.
market economy An economic system in which
resources are allocated through the decentralized
decisions of firms and consumers.
market equilibrium Exists at the only price where the
quantity supplied equals the quantity demanded.
Or, it is the only quantity where the price consum-
ers are willing to pay is exactly the price producers
are willing to accept.
money demand The negative relationship between
the nominal interest rate and the quantity of
money demanded as an asset plus the quantity of
money demanded for transactions.
money market The interaction of money demand
and money supply determines the “price” of
money, the nominal interest rate.
money multiplier Equal to one over the reserve
ratio; this measures the maximum amount of new
checking deposits that can be created by a single
dollar of excess reserves.
money supply The fixed quantity of money in cir-
culation at a given point in time as measured by
the central bank.
multiplier effect The idea that a change in any
component of aggregate demand creates a larger
change in GDP.
national debt The accumulation of all annual
budget deficits.
natural rate of unemployment The unemployment
rate associated with full employment, somewhere
between 4 to 6 percent in the United States.
net exports The value of a nation’s total exports
minus total imports.
net export effect The process of how expansionary
fiscal policy decreases net exports due to rising
interest rates. Another form of crowding out.
nominal GDP The value of current production at the
current prices.
nominal interest rate The interest rate unadjusted
for inflation. The opportunity cost of holding
money in the money market.
nonmarket transactions Household work or do-it-
yourself jobs that are missed by GDP accounting.
nonrenewable resources Natural resources that
cannot replenish themselves.15_AP Macroeconomics_2018_APPx_p215-238.indd 224 30/04/18 4:30 PM