An estimate of what the government's budget balance would be if output were exactly at potential, removing the effect of the business cycle.

The twelve-month accounting period the government uses for its budget.

Government debt held by individuals and institutions outside the government itself.

Government debt measured as a percentage of GDP, gauging the debt burden against the economy's ability to pay.

Future spending promises, such as Social Security and Medicare, that are not counted in the official public debt.

The Fed increasing the money supply to push interest rates down and raise aggregate demand.

The Fed reducing the money supply to push interest rates up and lower aggregate demand.

A cut in the interest rate raises investment and consumer spending, increasing aggregate demand and real GDP in the short run; a rate increase does the reverse.

A monetary policy rule that raises the target interest rate when inflation or the output gap is positive and lowers it when they are negative.

A forward-looking policy in which the central bank announces an inflation goal and sets rates to achieve it.

Because it faces fewer implementation lags than fiscal policy, monetary policy is generally the preferred tool for stabilizing the economy.

In the long run, a change in the money supply affects only the aggregate price level, not real GDP or the interest rate.

The view, useful for analyzing high inflation, that changes in the money supply move the aggregate price level proportionally even in the short run.

The loss in the real value of money holdings that the public suffers when the government prints money to finance its deficit.

The inflation rate times the real money supply; the real value of resources the government captures by printing money.

As people cut their real money holdings to avoid the inflation tax, the government must print faster to capture the same revenue, spiraling into hyperinflation.

Inflation caused by a rightward shift of aggregate demand, when total spending outruns the economy's capacity.

Inflation caused by a leftward shift of short-run aggregate supply, such as a rise in input costs or a negative supply shock.

A downward-sloping short-run relationship between the unemployment rate and the inflation rate.

The short-run Phillips curve moves up or down when the expected rate of inflation changes.

Vertical: once inflation expectations fully adjust, there is no lasting trade-off between unemployment and inflation.

The nonaccelerating inflation rate of unemployment, equal to the natural rate; pushing unemployment below it makes inflation accelerate.

A positive output gap goes hand in hand with below-normal unemployment, while a negative output gap goes with above-normal unemployment.

Once inflation is embedded in expectations, bringing it down is costly, requiring lost output and high unemployment, as the U.S. accepted to end the inflation of the 1970s.

A sustained fall in the aggregate price level.

When falling prices raise the real burden of outstanding debt, deepening an economic downturn.

The fact that nominal interest rates cannot fall below zero, which limits conventional monetary policy.

A situation in which interest rates have hit the zero bound, leaving conventional monetary policy unable to stimulate the economy.

The pre-Keynesian view that monetary policy affects only the price level, not output, and that the short run is unimportant.

The view that business cycles come from shifts of aggregate demand, often driven by business confidence, providing a rationale for active policy.

Using monetary and fiscal policy actively to smooth out the business cycle.

A doctrine calling for a fixed money-growth rule instead of discretionary policy, resting on a belief that the velocity of money is stable.

The relationship that the money supply times the velocity of money equals nominal GDP (M x V = P x Y).

The average number of times a dollar is spent per year, equal to nominal GDP divided by the money supply.

A formula that dictates how the central bank sets policy, as opposed to case-by-case discretion.

Central bank action taken case by case in response to conditions, rather than following a fixed rule.

The idea that policy cannot hold unemployment below the natural rate in the long run, limiting policy to stabilization.

Economic fluctuations produced when politicians manipulate policy for electoral gain, an argument for insulating monetary policy from politics.

A school arguing that even short-run policy may be ineffective; it includes the rational expectations and real business cycle approaches.

The view that people use all available information, so expected inflation adjusts at once and there may be no short-run inflation-unemployment trade-off.

The claim that business cycles are driven mainly by fluctuations in the growth rate of total factor productivity.

The argument that market imperfections make prices sticky, so changes in aggregate demand do affect real output.

The current view that monetary and fiscal policy both work in the short run but neither can lower unemployment in the long run, with discretionary fiscal policy generally discouraged except in special cases.