Macroeconomics and Money Practice Flashcards

These vocabulary flashcards cover key terminology from money, banking, national income aggregates, and aggregate demand theory as presented in the lecture notes.

Money

A thing which is commonly accepted as a medium of exchange; what money does including medium of exchange, measure of value, store of value, standard of deferred payment, and transfer of value.

Barter System

A system of exchange where goods were exchanged for goods, also known as a C-C economy (commodity-commodity economy).

Double Coincidence of Wants

A drawback of the barter system where two individuals are in possession of goods that they are willing to exchange for mutual satisfaction.

Fiat Money

Money which is issued by order or authority of the government, such as all notes and coins.

Fiduciary Money

Money that is accepted as a medium of exchange because of the trust between the payer and the payee, such as cheques.

Full Bodied Money

Money where the money value is equal to the commodity value (e.g., silver coins in olden times).

Credit Money

Money where the money value is greater than the commodity value (e.g., a ten rupee note).

Bank Rate

The rate of interest at which the RBI lends money to commercial banks for immediate loan requirements without any collateral or repurchase agreement.

Repo Rate

The rate at which the RBI offers short-period loans to commercial banks by buying government securities with a repurchase agreement.

Reverse Repo Rate (RRR)

The rate at which the RBI accepts deposits from commercial banks through government securities, allowing banks to generate interest income.

Open Market Operations (OMO)

The sale and purchase of securities in the open market by the RBI on behalf of the government to regulate liquidity.

Cash Reserve Ratio (CRR)

The minimum percentage of a bank's total deposits that is required to be kept with the RBI.

Statutory Liquidity Ratio (SLR)

The fixed percentage of assets that every bank is required to maintain in the form of liquid assets (cash, gold, or unencumbered approved securities).

Margin Requirement

The difference between the current value of the security offered for a loan and the value of the loan granted.

Moral Suasion

A combination of persuasion and pressure used by the RBI to induce commercial banks to follow its directives.

Credit Multiplier

The process of money creation calculated by the formula $\frac{1}{LRR}$, where $LRR$ is the Legal Reserve Ratio.

Final Goods

Goods that have crossed the boundary line of production and are ready for use by their final users (consumers or producers).

Intermediate Goods

Goods used by firms for resale or as raw materials that remain within the boundary line of production and have value yet to be added.

Capital Goods

Fixed assets of the producer used repeatedly in the process of production for several years and are of high value (e.g., plant and machinery).

Depreciation

The loss of value of fixed assets in use on account of normal wear and tear, accidental damages, and expected obsolescence.

Stock

A quantity measured at a particular point of time, such as wealth or money supply.

Flow

A quantity measured over a specified period of time, such as income, expenditure, or production.

Factor Income

Payments made by producing units (firms) to households for the use of factor services, including compensation of employees, rent, interest, and profit.

Transfer Income

Unearned income received without rendering any factor services, such as donations, charity, or gifts.

NFIA (Net Factor Income from Abroad)

The difference between factor income earned by our residents from the rest of the world and factor income earned by non-residents in our country.

Nominal GDP

The market value of final goods and services produced within the domestic territory of a country during an accounting year, estimated at current prices.

Real GDP

The market value of final goods and services produced within the domestic territory of a country, estimated at constant prices (base year prices).

GDP Deflator

The price index calculated as $\frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100$.

Aggregate Demand (AD)

The total sum of expenditure that people plan to incur on the purchase of goods and services produced in an economy during an accounting year.

Consumption Function

The functional relationship between consumption and income, expressed as $c = f(y)$ or linearly as $c = \bar{c} + bY$, where $\bar{c}$ is autonomous consumption and $b$ is MPC.

MPC (Marginal Propensity to Consume)

The ratio of change in consumption to change in income, expressed as $\frac{\Delta C}{\Delta Y}$.

APS (Average Propensity to Save)

The ratio of total savings to total income, expressed as $\frac{S}{Y}$.

Investment Multiplier (k)

The ratio of an initial increment in investment to the resulting increase in aggregate income, calculated as $k = \frac{\Delta Y}{\Delta I}$ or $k = \frac{1}{1-MPC}$ or $k = \frac{1}{MPS}$.

Involuntary Unemployment

A situation where people are not getting work even when they are willing and able to work at the existing wage rate.

Inflationary Gap

The vertical difference between planned aggregate demand and aggregate supply corresponding to full employment when $AD > AS$.

Deflationary Gap

The deficiency of aggregate demand where $AD < AS$ corresponding to full employment, resulting in underemployment equilibrium.