Glossary

adaptive expectations: People have adaptive expectations for inflation when they expect inflation the coming year to be equal to its level last year.
anchored
bank money: Money in the form of deposits in commercial banks. The bank allows bank deposits, created for example when the bank makes a loan, to be used as a means of exchange, debiting the buyer’s deposit and crediting the seller with a new deposit.
bargaining power: The extent of a person or firm’s advantage in securing a larger share of the economic rents made possible by an interaction.
base money, monetary base, high-powered money: Base money (also called the monetary base and sometimes high-powered money) consists of the cash held by households, firms, and banks, together with the balances held by commercial banks in their reserve accounts at the central bank.
credibility: Credibility for a central bank refers to the degree to which economic actors believe that the central bank will do what it says—particularly with respect to commitments to an inflation target or a fixed exchange rate.
current account (CA): The sum of all payments made to a country minus all payments made by the country. See also: current account deficit, current account surplus.
current account deficit: The excess of the value of a country’s imports over the combined value of its exports plus its net earnings from assets abroad. See also: current account, current account surplus.
current account surplus: The excess of the combined value of its exports and net earnings from assets abroad over the value of its imports. See also: current account, current account deficit.
default: A borrower who fails to repay a loan, or repays less than is required under the contract, is said to default on the loan. More generally, any failure to meet the terms of a contract can be described as a default.
deflation: A decrease in the general price level. See also: inflation.
demand side, demand-side: The demand side of the economy refers to the expenditure on the goods and services it produces, which consists of consumption, investment, government purchases, and purchases by foreigners. In a microeconomic model of the market for a particular good, it refers to the decisions of the buyers of the good. See also: supply side.
disinflation: A decrease in the rate of inflation. See also: inflation, deflation.
exchange rate: The number of units of home currency that can be exchanged for one unit of foreign currency. For example, Australia’s exchange rate between the Australian dollar (AUD) and the US dollar (USD) is defined as the number of AUD per USD. An increase in this number is a depreciation of the AUD, and a decrease is an appreciation of the AUD.
expected inflation: The belief formed by wage-setters and price-setters about the level of inflation in the next period. See also: inflation.
fixed exchange rate: A country’s exchange rate is fixed if it is managed by the central bank or the government, and is either held constant over time or kept within a narrow range of values. A country in a common currency zone effectively has a permanently fixed exchange rate relative to all other countries in the zone. See also: exchange rate, flexible exchange rate.
flexible exchange rate: A country’s exchange rate is flexible if it can change in response to trading in the foreign exchange markets, rather than being held constant by the government or central bank. See also: exchange rate, fixed exchange rate.
flow: A quantity measured per unit of time, such as weekly income, or annual carbon emissions. See also: stock.
game: A model of strategic interaction that describes the players, the feasible strategies, the order of play, the information that the players have, and their pay-offs. See also: game theory.
game theory: A branch of mathematics that studies strategic interactions, meaning situations in which each actor knows that the benefits they receive depend on the actions taken by all. See also: game.
government budget balance: The difference between government tax revenue and government spending (including government purchases of goods and services, investment spending, and spending on transfers such as pensions and unemployment benefits). See also: government budget deficit, government budget surplus.
government budget deficit: When the government budget balance is negative. See also: government budget balance, government budget surplus.
government budget surplus: When the government budget balance is positive. See also: government budget balance, government budget deficit.
gross domestic product (GDP): A measure of the market value of the output of final goods and services in the economy in a given period. Output of intermediate goods that are inputs to final production is excluded to prevent double counting.
gross national income (GNI): A measure of the total amount of income earned by residents in a country, irrespective of where the income was produced (within the country or abroad). It is different from gross domestic product, which measures the production within a country, irrespective of who owns the income that the production generates.
indexation: When wages in contracts rise automatically with the price index.
inflation: An increase in the general price level in the economy, usually measured as the percentage increase in prices over the last year. See also: deflation, disinflation.
inflation-stabilizing unemployment rate: The unemployment rate (at supply-side equilibrium) at which inflation is constant. Originally known as the ‘natural rate’ of unemployment. Also known as: structural unemployment rate, non-accelerating rate of unemployment (NAIRU). See also: structural unemployment.
inflation target, inflation targeting: Inflation targeting is a form of monetary policy, where the central bank changes interest rates in order to influence aggregate demand and keep the economy close to an inflation target rate, which is normally specified by the government.
inflation tax: The implicit transfer of resources from the public to the government caused by inflation eroding the value of money holdings.
means of exchange: One of the characteristics of money is that it serves as a means of exchange: something that buyers and sellers are willing to exchange for goods and services.
Nash equilibrium: An outcome is termed a Nash equilibrium if none of those involved, by individually choosing a different action, could bring about an outcome that they would prefer. In game theory, a Nash equilibrium is a set of strategies, one for each player in the game, such that each player’s strategy is a best response to the strategies chosen by everyone else. See also: game theory.
net foreign assets (NFA): The difference between a country’s foreign financial assets and its foreign financial liabilities at a given point in time, i.e. what residents or the government own abroad (e.g., foreign bonds, equity, real estate, reserves) minus what foreigners own in the country (e.g., domestic bonds held by foreigners, FDI, external debt). Also known as: net international investment position (NIIP).
net foreign debt (NFD): Net foreign debt (NFD) is equal to minus net foreign assets. When foreign liabilities are greater than foreign assets, NFD is positive.
nominal exchange rate: The number of units of the home currency that have to be exchanged to obtain one unit of a foreign currency—that is, the market exchange rate—is described as a nominal exchange rate to distinguish it from the real exchange rate, which is the relative price of foreign and domestic goods and services. See also: real exchange rate.
price markup: The price minus the marginal cost divided by the price. In other words, the profit margin as a proportion of the price. If the firm sets the price to maximize its profits, the markup is inversely proportional to the elasticity of demand for the good at that price.
price-setting curve, PS curve: A relationship showing, for each level of economy-wide employment, the real wage that results when firms maximize profits by setting prices as a constant markup on costs.
quantitative easing (QE): Central bank purchases of financial assets aimed at reducing interest rates on those assets when conventional monetary policy is ineffective because the policy interest rate is at the zero lower bound. See also: zero lower bound.
real exchange rate, competitiveness: The relative price of foreign and domestic goods and services; specifically, it is the price of foreign goods and services, converted into domestic currency at the market (nominal) exchange rate, divided by the price of domestic goods and services. The real exchange rate is a measure of competitiveness.
seigniorage: The revenue the government gains when the central bank creates new base money.
stock: A quantity measured at a point in time, such as a firm’s stock of capital goods, or the amount of carbon dioxide in the atmosphere. Its units do not depend on time. See also: flow.
store of value: One of the characteristics of money is that it can be used as a store of value: people can store their wealth in this form until they want to use it to buy goods and services.
structural unemployment: The level of unemployment where the supply side of the economy is in equilibrium. In the WS–PS model, it is the unemployment level at which the price-setting real wage equals the wage-setting real wage. See also: WS–PS model, Nash equilibrium, supply side.
supply-side equilibrium: The economy is in supply-side equilibrium when the markets involved in the production of output are in equilibrium. In the WS–PS model it is the labour market equilibrium; that is, where the price-setting real wage equals the wage-setting real wage.
supply side, supply-side: The supply side of the economy consists of the activities that produce the economy’s output, including the markets for labour and capital. In a microeconomic model of the market for a particular good it refers to the decisions of the sellers who supply the good to the market. See also: demand side.
terms of trade: A country’s terms of trade are measured by the ratio of the export price to the import price. When the price it receives for exports falls relative to the price it pays for imports, we say that its terms of trade have deteriorated.
tradable goods: Tradeable goods are those that can be exported, or are close substitutes for imported goods.
unit of account: A standard unit that is used to measure and compare the market value of different goods and services. One of the functions of money in the economy is to act as a unit of account.
wage–price spiral: This occurs if an initial increase in wages in the economy is followed by an increase in the price level, which is followed by an increase in wages and so on. It can also begin with an initial increase in the price level.
wage-setting curve, WS curve: A relationship showing, for each level of economy-wide employment, the wage that employers need to set to recruit and motivate workers.
WS–PS model: Model of the aggregate economy that combines wage-setting (WS) and price-setting (PS) decisions. Where the WS and PS curves intersect is the Nash equilibrium and determines structural unemployment and the real wage. See also: wage-setting curve, price-setting curve, structural unemployment.
zero lower bound: This refers to the fact that the nominal interest rate cannot be negative, thereby setting a floor on the nominal interest rate that can be set by the central bank at zero. See also: quantitative easing.