Glossary
Short, original definitions. Jump via the list or scroll. Terms link from topic pages across the site.
Aggregate demand
Total planned spending on domestic goods and services at a given price level: typically consumption, investment, government spending, and net exports. The classroom picture with aggregate supply is the aggregate demand and aggregate supply model.
Aggregate supply
The total output firms plan to produce at each price level. Short run aggregate supply slopes upward while some wages and prices are sticky. Long run aggregate supply is vertical at potential output. See the aggregate demand and aggregate supply model.
Balance of payments
A country’s statistical record of transactions with the rest of the world, spanning the current account, the capital account and the financial account. See the balance of payments explainer.
Base rate (Bank Rate)
The Bank of England’s main policy interest rate, which influences other sterling lending and deposit rates.
Bond
A debt security: the issuer borrows money and promises interest and principal payments on a schedule. Government bonds are central to fiscal finance and monetary transmission.
Capital stock
The accumulated machinery, buildings, infrastructure, and other produced assets used to generate output over time.
Comparative advantage
The ability to produce a good at a lower opportunity cost than another producer: the classic rationale for mutual gains from trade. Run the table in the opportunity cost and comparative advantage calculator. That opportunity cost is the slope on the production possibilities curve.
CPI (Consumer Price Index)
An index tracking the average change in prices of a basket of consumer goods and services. Used widely in both the UK and US, with methodological differences.
Crowding out
The idea that higher public borrowing can push up interest rates or absorb saving, reducing private investment. Strength depends on spare capacity and monetary response. The graphs are on the money market and loanable funds page.
Current account
The sum of the trade balance in goods and services plus net primary and secondary income with the rest of the world. How it pairs with the financial account is on the balance of payments page.
Deflation
A sustained fall in the general price level. Distinct from disinflation, which is a slowing of the inflation rate while prices may still rise.
Disinflation
A decline in the rate of inflation: prices may still be rising, just more slowly than before.
Elasticity
A measure of how much one variable responds to a change in another, such as quantity demanded to price. For the equilibrium price and quantity from a straight demand line and a straight supply line, try the supply and demand equilibrium calculator.
Equilibrium (market)
A situation where quantity supplied equals quantity demanded at the prevailing price, so there is no inherent pressure for that price to change from excess demand or supply. Try the supply and demand equilibrium calculator.
Exchange rate
The price of one currency in terms of another. Affects import costs, export competitiveness, and financial returns across borders. The AP graph is the foreign exchange market.
Federal funds rate
The US overnight interbank rate that the Federal Reserve targets as its primary monetary policy tool.
Fiscal deficit
When government spending exceeds government revenue over a period. Financed by borrowing (issuing debt) unless asset sales or money financing intervene.
GDP (Gross Domestic Product)
The market value of final goods and services produced within a country’s borders during a period.
Inflation
A sustained increase in the general level of prices, reducing the purchasing power of money.
Labour force
People who are employed plus those who are unemployed and actively seeking work.
Liquidity
How easily an asset can be bought or sold without a large price concession; also used for the abundance of spendable money and near-money.
Loanable funds market
The classroom market for saving and borrowing. Supply of loanable funds slopes up and demand slopes down. The vertical axis is the real interest rate, and the horizontal axis is the flow of funds. The comparison with the money market is the money market and loanable funds page.
Natural rate of unemployment
A conceptual rate consistent with stable inflation, reflecting frictional and structural factors rather than cyclical weakness. Introduction: natural rate of unemployment explained.
Nominal
Measured in current money terms, without adjusting for inflation. Contrast with real. The nominal interest rate is the vertical axis on the money market graph.
Opportunity cost
The value of the next-best alternative foregone when a choice is made. For the two good arithmetic, see the opportunity cost and comparative advantage calculator. The slope of a production possibilities curve is that cost for two goods.
Participation rate
Labour force divided by the working-age (or other defined) population. It shows how many people are engaged with the job market.
Policy rate
The short term interest rate set or targeted by a central bank to influence monetary conditions. The classroom picture of the nominal rate is the money market, and the ample reserves version is the reserve market.
Price level
An index summarising prices across many goods and services at a point in time; inflation is the growth rate of the price level.
Productivity
Output per unit of input, often labour productivity (output per hour worked) or total factor productivity.
Purchasing power
What a unit of currency can buy. Inflation erodes purchasing power over time.
Quantitative easing (QE)
Large-scale central-bank purchases of assets (often government bonds) to ease financial conditions when policy rates are near their effective lower bound. See quantitative easing explained.
Real interest rate
The interest rate adjusted for inflation: approximately nominal rate minus expected or actual inflation. The classroom graph for this rate is the loanable funds market. See also real interest rates.
Recession
A significant decline in economic activity lasting more than a brief period, visible in GDP, employment, and other indicators.
Stagflation
A combination of weak growth (or high unemployment) with high inflation. It is awkward for policy because demand stimulus can worsen prices. On a graph, see the aggregate demand and aggregate supply model.
Supply shock
A sudden change in production costs or availability (for example energy disruption) that shifts aggregate supply. See the aggregate demand and aggregate supply model.
Fiscal multiplier
An estimate of how much GDP changes when government spending or taxes change by one unit. Conditional on the cycle, monetary offset, and openness. See the fiscal multipliers explainer.
Phillips curve
A relationship linking labour-market slack to inflation pressure in the short run, which can shift when expectations change. Introduction: What is the Phillips curve?.
Purchasing power parity (PPP)
The idea that exchange rates should, over long periods, reflect relative price levels for comparable baskets. Used for living-standard comparisons; weak as a short-run FX forecast. See exchange rates and PPP.
Inverted yield curve
A yield curve shape in which some shorter-maturity government yields exceed longer-maturity yields (for example a negative 10-year minus 2-year spread). Introduction: yield curve explained.
Yield curve
A plot of interest rates on similar government bonds across maturities at one time: Treasuries in the US, gilts in the UK. Introduction: yield curve explained.
Okun's law
An empirical rule of thumb linking stronger real GDP growth to falling unemployment (and weaker growth to rising unemployment). The slope varies by country and period. Introduction: Okun's law explained.
M1
A narrow money supply aggregate focused on highly liquid balances used for payments, such as currency and chequeable deposits (exact components depend on the country’s statistical definition). See money supply M1 and M2. The classroom money market draws a stock like this as a vertical supply curve on the money market and loanable funds page.
M2
A broader money supply aggregate that includes M1 plus additional liquid retail instruments such as many savings deposits (definitions vary and can change). See money supply M1 and M2. That stock is the horizontal axis of the money market graph, not the flow of loanable funds.
Fiscal dominance
A situation in which government financing needs constrain monetary policy’s ability to pursue its inflation objective. Distinct from ordinary deficits and from QE as a chosen monetary tool. Introduction: fiscal dominance explained.