IB Economics Macro Section 3.5

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38 Terms

1

central bank

independent national authority that controls the monetary system

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2

money supply

total amount of money in circulation

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3

perfectly inelastic

because the money supply is fixed at any particular point in time, the supply of money is considered to be:

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4

recessionary gap

If the economy functions at a level LOWER than the full employment level, the economy experiences this.

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5

interest rate

what it costs to borrow money

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6

low interest rate

this will induce firms to invest and consumers to spend more

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7

high interest rate

this will induce firms and consumers to save

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8

lender of last resort

banks act as this in a financial crisis, when consumers may lose faith in their bank and the banks need financial support

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9

bond

a financial security that represents a promise to repay a fixed amount of funds

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10

reserve requirement

the proportion of deposits that a commercial bank must keep in its vaults in reserve

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11

aggregate demand

the total value of goods and services demanded by different groups at a given price level in an economy.

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12

purchasing power

the number of goods and services an individual can buy

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13

inflation targeting

the central bank using monetary policy to keep inflation close to an agreed target (~2%)

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14

low unemployment

a priority of monetary policy; the opposite of high unemployment

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15

fluctuations

the central bank is responsible for smoothing out ______ in the business cycle

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16

external balance

this is achieved when the revenue from a country's exports is equal to the payments made for imports.

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17

trade deficit

this occurs when visible imports outweigh visible exports.

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18

commercial banks

privately owned banks that accept deposits and make loans and provide other services for the public

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19

credit creation

the bank must keep a small percentage of deposited funds as cash. the rest they can lend out, and in doing so they pursue:

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20

deposit

the amount of money individuals put into the bank for safekeeping, and/or to earn interest.

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21

money multiplier

the amount of money the banking system generates with each dollar of reserves; reciprocal of the reserve requirement

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22

total deposits

initial deposit x money multiplier

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23

total credit creation

initial credit creation x money multiplier

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24

open market operations

the central bank buying and selling bonds to regulate the money supply

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25

expansionary monetary policy

monetary policy that increases aggregate demand

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26

contractionary monetary policy

monetary policy that reduces aggregate demand

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27

minimum lending rate

The rate at which the central bank charges commercial banks to borrow money. also known as the discount rate

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28

quantitative easing

when the Fed buys longer-term government bonds or other securities. expansionary.

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29

quantitative tightening

when the Fed sells longer-term government bonds or other securities. contractionary.

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30

expansionary

the following monetary policies are _______. decreasing MRR, buying bonds, and decreasing the discount rate.

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31

contractionary

the following monetary policies are _______. increasing MRR, selling bonds, and increasing the discount rate.

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32

demand for money

the willingness and the ability of economic agents (consumers, firms, etc.) to use money at a given interest rate and at a specific point in time

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33

transactions motive

the need to hold money for spending

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34

precautionary motive

holding money for unexpected expenses and impulse buying

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35

speculative motive

holding cash to avoid holding financial assets whose prices are falling

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36

buys bonds

if the central bank ________, it pays investors in cash. It is this payment in cash that increases the money supply

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37

nominal interest rate

the interest rate quoted by commercial banks (real interest rate + inflation premium)

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38

real interest rate

the interest rate with inflation taken into account

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