Macroeconomics

Sub-prime borrower:

A borrower with lower in-

come and assets and thus higher risk of default.

Substitution effect:

The change in consumption

of a good resulting from a movement along an indif-

ference curve because of a change in the relative

price. (Cf. income effect.)

Supply shocks:

Exogenous events that shift the ag-

gregate supply curve.

Tariff:

A tax on imported goods.

Tax multiplier:

The change in aggregate income

resulting from a one-dollar change in taxes.

Taylor principle:

The proposition that a central

bank should respond to an increase in inflation

with an even greater increase in the nominal 

interest rate.

Taylor rule:

A rule for monetary policy according

to which the central bank sets the interest rate as a

function of inflation and the deviation of output

from its natural level.