2.6.2: Monetary Policy

Base rate

Main interest rate set by a nation's central bank

Deflation

Persistent fall in the general price level - negative inflation

Depreciation

Fall in the external value of a floating exchange rate

Expansionary policy

Cuts in interest rates or an increased supply of credit designed to increase AD

Real interest rate

Nominal rate of interest adjusted for inflation

Fine tuning

Small / gradual changes in interest rates to achieve a desired macro outcome

Hot money

Money that flows freely and quickly around the world looking to earn the best % return

Liquidity trap

When a period of low interest rates fails to stimulate aggregate demand

Money supply

Entire quantity of a country's notes and coins, loans and credit

Quantitative easing

Introduction of new money into the national supply by a central bank

Asset bubble

A rise in the prices of housing and equities taking values above sustainable levels

Negative interest rates

When the central bank charges commercial banks for holding funds with them

Central bank

Responsible for operating monetary policy and maintaining financial stability

Inflation target

Objective set for the central bank to achieve price stability, the UK target is 2%

Managed float

When a central bank intervenes to influence the external value of a currency

Asset Purchase Scheme

Part of quantitative easing - where the central bank buys bonds from the banks

Devaluation

Fall in the external value of a currency inside a fixed exchange rate system

Output gap

Difference between actual and potential national output

Currency reserves

Money held by a central bank so that it can pay if need be its liabilities (debts)

Money market

Market for short term loan finance for businesses and households.