A central bank is banker to the
government and to the banks. It
also conducts monetary policy.
The money supply is currency
in circulation outside the
banking system, plus deposits
of commercial banks and
building societies.
A required reserve ratio is a
minimum ratio of cash reserves
to deposits that banks are
required to hold.
The discount rate is the
interest rate that the Bank
charges when banks want to
borrow cash.
An open market operation
occurs when the central bank
alters the monetary base by
buying or selling financial
securities in the open market.
The lender of last resort lends
to banks when financial panic
threatens the financial system.
A capital adequacy ratio is a
required minimum value of bank
capital relative to its outstanding
loans and investments.
The real money supply L is the
nominal money supply M
divided by the price level P.
In money market equilibrium
the quantity of real balances
demanded and supplied are
equal.
The monetary instrument is
the variable over which the
central bank makes day-to-day
choices.
An intermediate target is a key
indicator used to guide interestrate
decisions.
The transmission mechanism
of monetary policy is the
channel through which it affects
output and employment.
The wealth effect is the shift in
the consumption function when
household wealth changes.
The permanent income
Hypothesis says consumption
reflects long-run or permanent
income.
The life-cycle hypothesis
assumes people make a lifetime
consumption plan (including
bequests to their children) that
is just affordable out of lifetime
income (plus any initial wealth
inherited).
The investment demand
Schedule shows how desired
investment at each interest rate.
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