econ

real gap

the difference between the potential output of an economy and its actual output, often measured in terms of GDP.

aggregate demand

the total demand for goods and services within an economy at a given overall price level and in a given time period.

interest rate

the amount charged for borrowing money, typically expressed as a percentage of the principal.

investment demand

the relationship between the interest rate and the quantity of investment demanded by firms. It reflects how much businesses are willing to invest in capital projects based on prevailing interest rates.

aggregate demand

consists of the total spending by households, businesses, government, and net exports at various price levels.

monetary policy

the process by which a central bank manages the money supply and interest rates to achieve macroeconomic objectives like controlling inflation and promoting economic growth.

expansionary monetary policy

a central bank strategy to boost economic growth by increasing the money supply, making borrowing cheaper to encourage spending and investment, primarily used during downturns or recessions to lower unemployment, using tools like cutting interest rates, buying government bonds (open market operations), and reducing reserve requirements,

contractionary monetary policy

uses a central bank's tools to reduce the money supply, raise interest rates, and slow down economic growth to combat high inflation, making borrowing more expensive to decrease spending and investment, ultimately stabilizing prices.

reserve requirement

reserve requirement is the minimum percentage of customer deposits that banks must hold in cash or at the central bank, rather than lending out,

money multiple

• Definition: Shows how much the money supply (like M1/M2) expands from a base amount of reserves, through banks lending out deposits.

• Formula: 1 / Reserve Requirement.

• Example: If the reserve is 10%, the multiplier is 10x, meaning $100 in reserves can support $1,000 in deposits.

• Use: Explains how central banks influence money supply and credit. 

open market operation

AI Overview

Open Market Operations (OMOs) are when a central bank, like the

Federal Reserve, buys or sells government securities (bonds) on the open market to control the money supply, influence interest rates, and manage economic activity. Buying bonds injects money, lowering rates and stimulating the economy; selling bonds removes money, raising rates and cooling inflation. It's a key monetary policy tool used to steer short-term rates, like the federal funds rate, towards the FOMC's target. f

federal fund rate

AI Overview

The federal funds rate is the target interest rate for overnight lending between banks, set by the

Federal Reserve's FOMC committee to influence borrowing costs, inflation, and economic growth, impacting everything from mortgages to credit cards. The Federal Reserve sets a target range, and the effective rate is the market's daily average, with recent effective rates around 3.64% within a 3.50-3.75% target as of mid-December 2025,

money market

The term

money marketrefers to a global financial marketplace for short-term, highly liquid debt instruments, as well as two related products for individual consumers:money market accountsandmoney market funds.

expedeniture multipler

The expenditure multiplier (or spending multiplier) is a core Keynesian concept showing how an initial change in spending (like government spending or investment) creates a larger, magnified ripple effect on a nation's total GDP because that money gets re-spent multiple times through the economy. It's calculated as 1 / (1 - MPC) (or 1 / MPS), where MPC is the Marginal Propensity to Consume (how much people spend out of extra income) and MPS is the Marginal Propensity to Save. A higher MPC means a bigger multiplier, leading to greater economic impact from initial spending boosts, crucial for stimulating demand. 

liquidity

refers to how easily and quickly an asset can be converted into cash without losing significant value, with cash itself being the most liquid asset. High liquidity means quick conversion at a fair price (e.g., stocks, bonds), while low liquidity means difficulty and potential loss (e.g., real estate, collectibles). It's vital for meeting short-term obligations, managing risk, and taking advantage of opportunities, with measures like the current ratio assessing corporate liquidity. 

recognition lag

the time delay between an economic event (like a recession or inflation) starting and when economists, policymakers (government/central banks) realize it's actually happening, caused by slow data collection, processing, and analysis. This lag, often 3-6 months, is the first of several "inside lags" (before decision and implementation) that can hinder effective fiscal and monetary policy, potentially worsening economic cycles because problems are addressed late. i

implementation lag

Implementation lag is

the delay between a government's decision to enact an economic policy (fiscal or monetary) and when that policy actually takes effect and impacts the economy