Some general rules:

• A inverted yield curve, an unusual occurrence in which short-term interest rates are higher than long-term rates, is often considered a harbinger of trouble for the economy.
• Full employment (unemployment < 5%?) causes inflation
• Inflation is bad for business
• The Fed will raise interest rates when inflation gets too high.

Federal Reserve Chair nominee Ben S. Bernanke stated recently that he believes the economy can have both low inflation and employment growth. Current chairman Greenspan agrees that the two issues are compatible. These statements fly in the face of conventional macroeconomic wisdom that we canÕt have one without sacrificing the other.

- Inflataion - Fed monitary policy It is desirable to hold inflation to 1-2% per year. The Federal Resserve (Ben Bernanke - chairman) traditionally uses monitary policy (raising the federal funds rate to slow inflaation and lowering it to avoid a recession). Internataional Stability

In Sept. 2007 New York Times columnist Floyd Norris, showed that two recently observed conditions also existed prior to the last two recessions. The 6-month change in employment (using Household Survey data) had turned negative and the spread between 2-year Treasury yields and the Fed Funds rates fell to less than -1.3 percentage points. This yield spread fell to similar levels prior to both the 1990 and 2001 recession. The six-month change in employment data turned down in the same month the 1990 recession began, and a few months before the 2001 recession.

In "Recessions and Stock Prices" at Hussman Funds, William Hester, CFA says: "Though simple in its construction, it's an intuitive combination of data. When the two-year Treasury yield falls steeply below the Fed Funds rate, the market is already anticipating weakness that the Fed tends to be slower to recognize. Weakening job growth data provides early evidence of that economic weakness.
  I substituted the Fed's Discount Rate for the Funds Rate, and used the one-year Treasury yield from available data. In the eight recessions since 1955 these two warnings (rate spread and unemployment) emerged prior to or during seven of them.

1974: 1.4% fall in GDP
1975: 0.6% fall
1980: 2.1% fall
1981: 1.5% fall
1991: 1.4% fall

Stocks tend to drop prior to a recession, however this not a cause-effect relation, but stocks are anticipating a business slowdown.

Adam Smith (1723-90)

Scottish educator is often seen as the founding father of economics.

Inflation

Increasing prices. See above.

CPI

Consumer Price Index

GDP

Gross Domestic Product

Fiscal Policy

Government budget controlled by congress. Taxes and Spending.

Invisible hand

The invisible hand is an expression that came about from "An Inquiry into the Nature and Causes of the Wealth of Nations", 1776 by Adam Smith. He argued that the 'invisible hand' would organise markets and ensure that they arrived at the optimum outcome. This would all happen by individuals and firms pursuing their self-interest, yet despite this apparent selfishness, the invisible hand of markets still ensured the best outcome for all concerned.

Laissez-faire

The term "laissez-faire" is used to describe an economic system where the government intervene as little as possible and leave the private sector to organise most economic activity through markets.

Monetary Policy

The regulation of the money supply and interest rates by a central bank, such as the Federal Reserve Board.

Money Supply

Currency issued by the Federal Reserve System and the U.S. TreasuryÑand deposits held by the public at commercial banks, credit unions, ...
An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, and thus stimulating spending. Measured by indicators M1 ($1.3 trillion in 2004), M2 ($6.3T) and M3 ($9.3 T).
See EconLib.org

Real GDP

The level of GDP after changes in inflation have been taken into account.

Reagonomics

The most serious attempt to change the course of U.S. economic policy of any administration since the New Deal. "Only by reducing the growth of government," said Ronald Reagan, "can we increase the growth of the economy."

Recession

Decreasing GDP, Job Market, ... See above.

Supply-side policies

Supply-side policies are policies that improve the workings of markets. In this way they improve the capacity of the economy to produce and so shift the aggregate supply curve to the right. This should enable the economy to grow in a non-inflationary way.

Blogs:
Grasping Reality by Brad DeLong