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 central 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 interest rate 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 the desired investment at each interest rate.