Macroeconomics

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Open-market operations:

The purchase or sale 

of government bonds by the central bank for the

purpose of increasing or decreasing the money 

supply.

Optimize:

To achieve the best possible outcome

subject to a set of constraints.

Outside lag:

The time between a policy action and

its influence on the economy. (Cf. inside lag.)

Outsiders:

Workers who are not employed and

therefore have no influence on wage bargaining. 

(Cf. insiders.)

Paasche price index:

A measure of the level of

prices based on a changing basket of goods. (Cf.

Laspeyres price index.)

Permanent income:

Income that people expect

to persist into the future; normal income. (Cf. transi-

tory income.)

Permanent-income hypothesis:

The theory of

consumption according to which people choose

consumption based on their permanent income, and

use saving and borrowing to smooth consumption in

response to transitory variations in income.

Phillips curve:

A negative relationship between

inflation and unemployment; in its modern form, a

relationship among inflation, cyclical unemployment,

expected inflation, and supply shocks, derived from

the short-run aggregate supply curve.

Pigou effect:

The increase in consumer spending

that results when a fall in the price level raises real

money balances and, thereby, consumers’ wealth.