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Key concepts (11) - Coggle Diagram
Key concepts (11)
Chapter 15
Real interest rate
The interest rate corrected for inflation (that is, the nominal interest rate minus the rate of inflation). It represents how many goods in the future one gets for the goods not consumed now.
Fisher equation
The relation that gives the real interest rate as the difference between the nominal interest rate and expected inflation: real interest rate = nominal interest rate – expected inflation.
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Protectionist policy
Measures taken by a government to limit trade; in particular, to reduce the amount of imports in the economy. These are designed to protect local industries from external competition. They can take different forms, such as taxes on imported goods or import quotas.
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Inflation targeting
Monetary policy regime where the central bank changes interest rates to influence aggregate demand in order to keep the economy close to an inflation target, which is normally specified by the government.
Real wage
The nominal wage, adjusted to take account of changes in prices between different time periods. It measures the amount of goods and services the worker can buy.
Opportunity cost
When taking an action implies forgoing the next best alternative action, this is the net benefit of the foregone alternative.
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.
Chapter 15
Policy (interest rate)
The interest rate set by the central bank, which applies to banks that borrow base money from each other, and from the central bank. Also known as: base rate, official rate.
Lending rate (bank)
The average interest rate charged by commercial banks to firms and households. This rate will typically be above the policy interest rate: the difference is the markup or spread on commercial lending. Also known as: market interest rate
Demand shock
An unexpected change in aggregate demand, such as a rise or fall in autonomous consumption, investment, or exports.
Zero lower bound
This refers to the fact that the nominal interest rate cannot be negative, thus setting a floor on the nominal interest rate that can be set by the central bank at zero.
Supply shock
An unexpected change on the supply side of the economy, such as a rise or fall in oil prices or an improvement in technology.
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.
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Common currency area
A group of countries that use the same currency. This means there is just one monetary policy for the group. Also known as: currency union.
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Exchange rate
The number of units of home currency that can be exchanged for one unit of foreign currency. For example, the number of Australian dollars (AUD) needed to buy one US dollar (USD) is defined as number of AUD per USD. An increase in this rate is a depreciation of the AUD and a decrease is an appreciation of the AUD.
Feasible set
All of the combinations of the things under consideration that a decision-maker could choose given the economic, physical or other constraints that he faces.
Great moderation
Period of low volatility in aggregate output in advanced economies between the 1980s and the 2008 financial crisis. The name was suggested by James Stock and Mark Watson, the economists, and popularized by Ben Bernanke, then chairman of the Federal Reserve.
Bargaining gap
The difference between the real wage that firms wish to offer in order to provide workers with incentives to work (the wage-setting curve), and the real wage that allows firms the markup on costs required to motivate them to continue in business (the price-setting curve).
- When the bargaining gap is positive, the real wage on the wage-setting curve is above the price-setting curve, and the claims of employers and owners to output per worker are inconsistent.
- The percentage bargaining gap is equal to the wage on the wage-setting curve, minus the wage on the price-setting curve, divided by the wage on the price-setting curve.
Inflation targeting
Monetary policy regime where the central bank changes interest rates to influence aggregate demand in order to keep the economy close to an inflation target, which is normally specified by the government.
Bargaining gap
The difference between the real wage that firms wish to offer in order to provide workers with incentives to work, and the real wage that allows firms the markup that maximizes profits given the degree of competition.
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