money market
the market for money in which the amount supplied and the amount demanded meet to determine the nominal interest rate
transaction demand for money
the demand for money based on the desire to facilitate transactions
illiquid
not easily transferable to money
liquidity demand for money
the demand for money that represents the needs and desires individuals and firms have to make transactions on short notice without incurring excessive costs
speculative demand for money
the demand for money that arises because holding money over short periods of time is less risky than holding stocks or bonds
open market operations
the purchase or sale of US government securities by the Fed
open market purchases
the Fed's purchase of government bonds from the private sector
open market sales
the Fed's sale of government bonds to the private sector
discount rate
the interest rate at which banks can borrow from the fed
federal funds market
the market in which banks borrow and lend reserves to and from one another
federal funds rate
the interest rate on reserves that banks lend each other
price of bond
promised payment/ (1 + interest rate)
exchange rate
the price at which currencies trade for one another in the market
depreciation of a currency
a decrease in the value of a currency
open market bond purchases
increase in money supply, fall in interest rates, rise in investment spending, fall in exchange rate, increase in NX, increase in GDP
open market bond sale
decrease in money supply, rise in interest rates, fall in investment spending, rise in exchange rate, decrease in NX, decrease in GDP
appreciation of a currency
an increase n the value of a currency
when unemployment is below the natural rate
output is above full potential, wages and prices rise
when unemployment is above the natural rate
output is below full potential, wages and prices fall
wage-price spiral
the process by which changes in wages and prices cause further changes in wages and prices
liquidity trap
a situation in which nominal interest rates are so low, they can no longer fall
political business cycle
the effects on the economy of using monetary policy or fiscal policy to stimulate the economy before an election to improve reelection prospects
long-run neutrality of money
a change in the supply of money has no effect on real interest rates, investment, or output in the long run
Say's Law
supply creates its own demand
exchange rate
the price at which currencies trade for one another in the market
euro
the common currency in Europe
real exchange rate
exchange rate*US price index/ foreign price index
law of one price
the theory that goods easily tradable across countries should sell at the same price in a common currency
purchasing power parity
a theory of exchange whereby a unit of any given currency should be able to buy the same quantity of goods in all countries
balance of payments
a system of accounts that measures transactions of goods, services, income, and financial assets between domestic households, businesses, and governments and residents of the rest of the world during a specific time period
current account
net exports (exports-imports) + net income received from abroad + net transfers abroad
financial account
the value of a country's net sales (sales-purchaes) of assets --> foreign purchases of US assets-US purchases of foreign assets
capital account
the value of capital transfer and transaction in non-produced, non-financial assets in the international account
net international investment position
domestic holding of foreign assets minus foreign holdings of domestic assets
sovereign investment fund
assets accumulated by foreign governments that are invested abroad
foreign exchange market intervention
the purchase or sale of currencies by the government to influence the market exchange rate
flexible exchange rate system
a currency system in which exchange rates are determined by free markets
fixed exchange rate system
a system in which governments peg exchange rates to prevent their currencies from fluctuating
balance of payments deficit
under a fixed exchange rate system, a situation in which the supply of a country's currency exceeds the demand for the currency at the current exchange rate
balance of payments surplus
under a fixed exchange rate system, a situation in which the demand of a country's currency exceeds the supply for the currency at the current exchange rate
devaluation
a decrease in the exchange rate to which a currency is pegged under a fixed exchange rate system
revaluation
an increase in the exchange rate to which a currency is pegged under a fixed exchange rate system