Glossary - G01-G16_Gloss_Econ.qxp 11/9/05 9:47 AM Page G-1...

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Glossary ability-to-pay principle: the princi- ple of tax fairness by which those with greater ability to pay a tax should pay more tax. absolute advantage: the advantage conferred by the ability to produce a good more efficiently—at lower cost of resources —than other producers. absolute value: the value of a num- ber without regard to a plus or minus sign. accelerator principle: the proposi- tion that a higher rate of growth in real GDP leads to higher planned investment spending, because high growth in real GDP is indicative of high growth in sales, which encour- ages firms to invest. accounting profit: revenue minus explicit costs and depreciation. actual investment spending: the sum of planned investment spending and unplanned inventory investment . administrative costs (of a tax) : the resources used (which is a cost) both to collect the tax and to pay it. adverse selection: occurs when an individual knows more about the way things are than other people do. Adverse selection problems can lead to market problems: private information leads buyers to expect hidden prob- lems in items offered for sale, which leads to low prices, which leads to the best items being kept off the market. aggregate consumption function: an equation relating aggregate current disposable income and aggregate con- sumer spending for the economy as a whole. A common form for the aggre- gate consumption function is C = A + MPC × YD . aggregate demand curve: a graphical representation of the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world. The aggregate demand curve has a negative slope due to the wealth effect of a change in the aggregate price level and the interest rate effect of a change in the aggregate price level . aggregate output: the economy’s total production of final goods and services for a given time period, usual- ly a year. Real GDP is the numerical measure of aggregate output typically used by economists. aggregate price level: the overall price level for final goods and services in the economy. aggregate production function: a hypothetical function that describes how productivity (real GDP per work- er) depends on the quantities of phys- ical capital per worker and human capital per worker as well as the state of technology. It has the general form Y/L = f(K/L, H/L, T) . aggregate spending: the sum of consumer spending, investment spending, government purchases, and exports minus imports. It is the total spending on domestically pro- duced final goods and services in the economy. aggregate supply curve: a graphical representation of the relationship between the aggregate price level and the quantity of aggregate output supplied. antitrust policy:
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Glossary - G01-G16_Gloss_Econ.qxp 11/9/05 9:47 AM Page G-1...

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