Macroeconomics

Liquidity constraint:

A restriction on the amount

a person can borrow from a financial institution,

which limits the person’s ability to spend his future

income today; also called a borrowing constraint.

Liquidity-preference theory:

A simple model of

the interest rate, based on the ideas in Keynes’s Gen-

eral Theory, which says that the interest rate  adjusts to

equilibrate the supply and demand for real money

balances.

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LM curve:

The positive relationship between the

interest rate and the level of income (while holding

the price level fixed) that arises in the market for real

money balances. (Cf. IS–LM model, IS curve.)

Loanable funds:

The flow of resources available to

finance capital accumulation.

Lucas critique:

The argument that traditional

policy analysis does not adequately take into ac-

count the impact of policy changes on people’s 

expectations.