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Balance of payments
The records of the transactions of residents of a country with the rest of the world.
Current account
Account that includes trade in goods and services and transfer payments.
Capital account
Account that involves purchases and sales of assets, such as bonds and stocks.
Exchange rate
The price of one currency in terms of another currency.
Fixed exchange rate system
A system where foreign central banks buy and sell currencies at fixed prices.
Floating exchange rate system
A system where exchange rates are allowed to adjust according to supply and demand.
Purchasing power parity (PPP)
A condition where currencies are equal in purchasing power for a basket of goods.
Net exports
The excess of exports over imports, calculated as X-Q.
Marginal propensity to import
The fraction of an extra dollar of income spent on imports.
Expansionary Monetary Policy
A policy that decreases interest rates to stimulate borrowing and spending, increasing aggregate demand.
Contractionary Monetary Policy
A policy that increases interest rates to curb borrowing and spending, decreasing aggregate demand.
Real exchange rate
The exchange rate adjusted for price level differences between countries.
IS curve
A curve that represents the relationship between interest rates and output in the goods market.
Capital mobility
The ability of capital to move freely across borders in search of higher returns.
Nominal exchange rate
The quoted price of one currency compared to another in current terms.
Deficit
A situation where expenses exceed income, needing financing through borrowing or selling assets.
