Reference: J. Crook's lectures, UEBS
-A-
Actual Output: Determined by AD (from the previous year or period of measurement)
AD: Aggregate Demand
Assets: Money (cash, pays no interest) and Bonds (pays interest)
Autonomous: not dependent on income (Y)
-B-
Balanced Budget (Govt.): NTp=Gp (expenditures equal net taxes)
BOP: balance of payments, X-Z
Bd: Demand for bonds
Ld+Bd=Ls+Bs (demand for wealth = supply of wealth )
Bs: Supply of Bonds
-C-
C: Cash held by individuals and firms (not banks)
Clearing System: Net amounts of debts are settled between banks at the end of the day, removing the need to transfer funds for each individual transaction.
cb: R/D (Cash held by banks/Deposits); also called the reserve ratio
- Factors which affect cb:
- (interest rates paid on lending)/(interest rate paid to depositors)
- If this ratio is high, banks have less incentive to keep money as cash.
- Unpredictability of withdrawals: higher unpredictability leads banks to maintain a higher cb
- Factors which affect cp:
- nominal interest rate: higher i leads to a higher opportunity cost in holding money in cash
- price level: higher prices lead to more cash held by individuals and firms
- level of real income: higher income leads to higher cash savings because of the desire to engage in cash transactions increases with income
-D-
d: change in (my shorthand for delta)
demand: quantity of a good or service that buyers wish to buy at each possible price
Direct Taxes: td, income taxes
Discount Rate: rate used by banks to obtain funds from the central bank
Disposable Income: c(1-t)y; where c is the marginal propensity to consume and t is the direct tax rate
-E-
equilibrium: AD=Y
Expansionary Monetary Policy: Central banks expand the money supply by:
- buying bonds
- reducing rr
- reducing the discount rate
Factor Income: Income which comes from selling labor, land and capital.
Flow: quantity per unit time
Four Sector Economy:
- households
- firms
- overseas market
- government sector
GDP (Gross Domestic Product): "Gross" indicates before deducting capital depreciation
-H-
Hot Money: monetary base; M0 (also called high powered money)
-I-
Income (National): Net National Product
Injection: Introduction of money into the financial system.
Investment: purchase of new capital goods by firms
-J-
-K-
-L-
Ld: demand for money
Ls: supply of money; M4
Leverage ratio: loans/deposits
Liquidity vs. Solvency: Having money in cash versus having net assets on a balance sheet.
Liquidity ratio: cash/deposits
LRAS: long run aggregate supply (in the long run, wages adjust)
-M-
M0: monetary base; quantity of cash held by banks including deposits and cash in circulation outside of banks
M4: Cash in circulation outside of banks and sight deposits, time deposits, CDs and building society (S&L) deposits
MB: Marginal Benefit; the benefit from getting one more of something
MC: Marginal Cost; the cost of getting one more of something
Money:
- Means of exchange; main function
- Unit of account which retains value (requires low inflation to be true!)
- Store of Value
- cp: C/D (currency drain ratio)
- cb: R/D (reserve ratio)
- change in reserve ratio cb
- change in discount rate
- open maker operations: central bank creates money and purchases bonds to increase the money supply. To decrease the money supply it sells bonds for cash, thereby decreasing the money supply
Money Supply: amount of money in the economy. When banks lend money, they are increasing the money supply. The multiplier relating M0(money multiplier)=M4 describes the extent that banks increase the money supply.
-N-
Network Externality: Also called a network effect. The effect that one user of a good or service has on the value of that product to other people. When network effect is present, the value of a product or service increases as more people use it. <Example> Community software is an example where the value is driven not solely by the features but by users of the features and content that they generate.
NPV: Net present value= -C0 + R1/(1+r) + R2/(1+r)^2+... (where C0 is initial expense in purchasing a bond, and R1, R2 the returns in a given time period. r is the nominal interest rate.)
-O-
open market operations: quantitative easing; the central bank creates money and exchanges this for securities that banks hold
open economy: exports and imports may occur
output multiplier: Keynsian multiplier; (change in equilibrium income)/(change in autonomous expenditure)
-P-
p: price index; (eg: CPI) price level
PDI: Personal Disposable Income
Phillips Curve: Shows unemployment vs. inflation
Potential Output: level of output if all factors of production are fully employed. If w and p are fully flexible, Y is at potential output.
portfolio choice: how much to hold in bonds versus cash?
price elasticity of demand= dQd(%)/dP(%)
price elasticity of supply = dQs(%)/dP(%)
PV: Present Value; The present value of a future recipt is discounted as follows: PV=R1/(1+r) where R1 represents the future receipt.
-Q-
Qd: Quantity Demanded
Qs: Quantity Supplied
-R-
r: interest rate of bonds
R: Cash held by banks (Cash Reserves)
real money: m/p
real interest rate: i=r-π
real wage: w/p
reverse repo: selling a bond to the bank with the promise to pay it back with interest. This is a bank loan, and shows up as an asset on the bank's B/S.
repo: sale and repurchase agreement
-S-
Sight Deposits : money that you can withdraw from a bank "on sight" (immediately)
Supply: quantity of a good or service that sellers wish to sell at every possible price
-T-
-U-
-V-
-W-
w: nominal wage (w/p represents real wage which is price adjusted).
