Rational economic agents are assumed to make the best possible use of all publicly available information, then make informed, rational judgments on what the future holds. Any errors in their forecasts will be randomly distributed.

Occurs when a small amount of capital is used to support a larger amount of investment by borrowing. The risk of highly leveraged investments is that a small decrease in price can wipe out one’s account.

Inflationary expectations are formed from a simple extrapolation from past events.

Employers often pay their workers wages above the market-clearing level to improve morale and productivity, reduce turnover, and create a disincentive for employees to shirk their duties.

The rate of inflation expected by workers for any given period. Workers do not work for a specific nominal wage but for what those wages will buy (real wages); therefore, their inflationary expectations are an important determinant of what nominal wage they are willing to work for.

Simultaneous occurrence of rising inflation and rising unemployment.

A financial instrument that insures against the potential default on an asset. Because of the extent of defaults in the last financial crisis, issuers of credit default swaps could not repay all of the claims, bankrupting these financial institutions.

A phenomenon that takes place after a recession, when output begins to rise, but employment growth does not.

The original curve posited a negative relationship between wages and unemployment, but later versions related unemployment to inflation rates.

Mortgages that are given to borrowers who are a poor credit risk. These higher-risk loans charge a higher interest rate, which can be profitable to lenders if borrowers make their payments on time.

Occurs when debt is reduced by increasing the money supply, thereby making each dollar less valuable through inflation.