Monetary policy Topic 3

Financial Markets

Platforms for buying and selling financial instruments such as stocks, bonds, and currencies.

Money

An item that is generally accepted as a means of payment for economic transactions.

Income

The earnings from work, interest, and dividends measured per unit of time; indicative of flow.

Wealth

The total value of all financial assets minus financial liabilities; a stock variable.

Central Bank

An institution that manages a state's currency, money supply, and interest rates.

Monetary Policy

Action taken by a central bank to control the money supply and achieve macroeconomic goals.

Open Market Operations

The buying and selling of government securities in the open market to influence money supply.

Reserve Ratio

The fraction of deposits banks are required to hold as reserves.

Fiat Money

Currency that has value by government decree, not backed by physical commodities.

Liquidity Risk

The risk of not being able to sell an asset without incurring a loss.

Quantitative Easing

An unconventional monetary policy where a central bank buys financial assets to increase money supply.

Fractional-Reserve Banking

A banking system in which banks hold only a fraction of deposits as reserves.

2008 Financial Crisis

A global economic crisis characterized by a dramatic increase in mortgage delinquencies and bank failures.

Commodity Money

Money that is based on a physical commodity, like gold or silver.

Velocity of Money

The frequency at which a unit of currency is used for transactions within a specific period.

M1, M2, M3

Different measures of the money supply: M1 includes cash and deposits, M2 includes M1 plus short-term deposits, M3 includes M2 plus larger liquid assets.

Monetary Base (MB)

The total amount of a currency in circulation or held in reserves by the central bank.

Interest Rate

The amount charged by a lender to a borrower for the use of assets, typically expressed as a percentage.

Deposit Insurance

A measure to protect depositors by guaranteeing that their deposits are safe up to a certain amount.

Banking Intermediary

Financial institutions that connect savers (depositors) with borrowers.

Consumer Choices

Decisions made by individuals regarding the purchase of goods and services based on budget constraints and preferences.

Saving

The portion of income that is not spent on consumption; a flow measure.

Fiscal Policy

Government spending and taxation policies used to influence economic conditions.

Bank Run

A situation where many depositors withdraw their funds from a bank simultaneously due to concerns about the bank's solvency.

Economic Downturns

Periods in which the economy is performing worse than normal, leading to declining economic activity.

Stock Variable

A variable measured at one specific time, as opposed to being a flow variable over time.

Lender of Last Resort

A function of the central bank where it provides loans to banks that are experiencing financial difficulty.

Market Liquidity

The ability to buy or sell assets in the market without causing a significant change in their price.

Inflation

The rate at which the general level of prices for goods and services is rising.

Deflation

A decrease in the general price level of goods and services.

Budget Deficit

A situation where expenses exceed revenue, indicating negative savings.

Budget Surplus

A situation where revenue exceeds expenses, indicating positive savings.

Trade Balance

The difference between a country's exports and imports.

Consumer Price Index (CPI)

A measure that examines the weighted average of prices of a basket of consumer goods and services.

Producer Price Index (PPI)

A measure that examines the average change over time in the selling prices received by domestic producers.

Fiscal Stimulus

Government policy aimed at stimulating economic activity, typically through increased public spending or tax cuts.

Economic Recession

A significant decline in economic activity across the economy lasting longer than a few months.

Balance of Payments

A record of all economic transactions between residents of a country and the rest of the world.