Glossary

Absolute income hypothesis: The basic principle of absolute income hypothesis is that the individual consumer will determine the fraction of his current income that he will allocate to consumption on the basis of his absolute income level.

Accelerator principle: The basic relationship that exists between the investment and the change in the output level is known as the accelerator principle.

Accelerator: The capital output ratio, k, is known as the accelerator.

Accommodating transactions: Accommodating transactions are those transactions that take place for the specific purpose of equalizing the balance of payments from an accountant’s point of view.

Aggregate demand curve: The aggregate demand curve shows the different combinations of output level and the price level at which the goods and money markets are simultaneously in equilibrium.

Aggregate demand: Aggregate demand is the total amount of goods demanded in an economy.

Aggregate supply curve: The aggregate supply curve shows the quantity of the output that the firms are ready to supply for each given price level.

Arbitrage: Arbitrage is the simultaneous buying and selling of different foreign currencies in the different foreign exchange markets to take advantage of the difference in the prices.

Autonomous investment: Investment that does not change due to a change in income and the interest rate is called autonomous investment.

Autonomous transactions: Autonomous transactions are those transactions that take place independently of other items in the balance of payments. They take place for the satisfaction that they give or for the profit that they yield.

Average Propensity to Consume (APC): The APC is defined as the ratio of consumption to income for different levels of income.

Balance of invisible trade: The balance of invisible trade is the difference between the exports and imports of services.

Balance of payments: The balance of payments is a summary statement of all the economic transactions between the residents of one country with the rest of the world during a particular period of time, which is usually a year.

Balance of trade: The balance of trade is the difference between the exports and imports of goods.

Balanced budget multiplier: The balanced budget multiplier is the increase in the output as a consequence of equal increases in the government expenditure and taxes. It is equal to one.

Balanced budget: The budget is in balance when the government expenditures plus transfer payments equal the gross tax receipts or, in other words, G = T.

Bank rate: Bank rate or the discount rate is the rate of interest at which the central bank rediscounts eligible bills of exchange or other commercial papers.

Bears: Bears are those who expect that the price of bonds will fall in the future.

Bond: A bond is an asset that carries a promise to pay to its owner a fixed amount of income per annum. This income entitles the owner of the bond to a future income stream.

Budget surplus: Budget surplus is the excess of government revenue over its total expenditures.

Bulls: Bulls are those who expect that the price of bonds will rise in the future.

Capital: Capital is the accumulated stock of plant and equipment, which is held by the business firms.

Capital account of the balance of payments: The capital account of the balance of payments measures the outflow and inflow of capital into the economy.

Consumer Price Index (CPI): Consumer Price Index (CPI) is a weighted average of prices of a specified basket of goods and services, which are purchased by the consumers.

Consumption function: The consumption function is a relationship between income and consumption expenditure.

Cost push inflation: When the increase in the price level is due to an increase in the aggregate supply, it is called cost push inflation.

Credit multiplier: Credit multiplier is the ratio of the change in the amount of credit to the change in reserves.

Crowding out: Crowding out is a situation which takes place when an expansionary fiscal policy causes an increase in the rate of interest leading to a decrease in private spending, especially the investment level.

Currency: Currency includes both coins and paper notes, though paper notes are the more predominant of the two.

Currency board: Currency board is an arrangement under which the central bank of a country holds enough amount of a foreign currency to back, in a fixed ratio, each and every unit of the domestic currency.

Currency deposit ratio: Currency deposit ratio is the currency held by the public as a fraction of their demand deposits.

Current account of the balance of payments: The current account of the balance of payments measures the flow of goods, services and income which occurs across the national borders.

Demand deposits: Demand deposits of banks are current account deposits, which are payable on demand either by cheque (with no restrictions) or otherwise.

Demand pull inflation: When the increase in the price level is due to an increase in the aggregate demand, it is called demand pull inflation.

Deposit money: Deposit money or chequeable deposits are entries in the ledgers of the bank to the credit of the holder.

Deposit multiplier: Deposit multiplier is the ratio of the change in deposits to the change in reserves.

Devaluation: Devaluation refers to a conscious action by the monetary authorities to lower the value of a currency with respect to the price of gold.

Direct action: Direct action refers to the coercive actions resorted to by the central bank against those banks who do not function according to its directives.

Direct taxes: Direct taxes are levied directly and include personal income and corporate income taxes.

Disinflation: Disinflation is a situation where there occurs a decrease in the rate at which prices are rising.

Disposable Personal Income: Disposable personal income is the amount, which is actually available to the households and to the non-corporate businesses after they have fulfilled their tax obligations to the government.

Dollarization: Dollarization is a situation where a country abandons its domestic currency and adopts a strong foreign currency like the dollar.

Dynamic Models: Dynamic models are those models that trace the changes that occur in the values of the different variables over time.

Economic growth: Economic growth can be defined as the increase in an economy’s output over a period of time.

Employed: A person is employed if during the reference week: (a) he did any work (at least one hour) as a paid employee, worked in his own business, profession, or on his own farm, or worked 15 hours or more as an unpaid worker in an enterprise operated by a member of a family, or (b) was not working but had a job or business from which he was temporarily absent, whether or not he was paid for the time off or was seeking another job.

Equilibrium: Equilibrium is a state of balance or a state where there is no change.

Excess reserves: Excess reserves are reserves in excess of the required reserves.

Exchange rate: The exchange rate is the rate at which one country’s currency exchanges for another country’s currency.

Expenditure reducing policies: Expenditure reducing policies are aimed at bringing about a change in the aggregate expenditure in the country.

Expenditure switching policies: The expenditure switching policies work mainly through changing the relative price of exports and imports.

Fiscal policy multiplier: The fiscal policy multiplier depicts the changes in the equilibrium income level due to an increase in government expenditure, holding the real supply of money constant.

Fiscal policy: Fiscal policy refers to the government’s policy regarding government expenditure, taxation and public borrowing with the view to achieving certain well-defined macroeconomic objectives.

Flow: Flow is a quantity measured over a period of time.

Foreign exchange market: The foreign exchange market is a market where foreign currencies (or foreign exchange) are purchased and sold by individuals, firms, commercial banks and the central banks of the different countries.

Forward transaction: A forward transaction is one which involves an agreement between the buyer and the seller to purchase or sell a fixed amount of currency for a predetermined rate at a specified date in the future.

Frequency of unemployment: The frequency of unemployment is defined as the average number of times, per period, that the workers become unemployed.

Full employment budget surplus: The full employment budget surplus measures the budget surplus at the full employment level of income.

General Equilibrium Approach: General equilibrium approach involves a state where all the markets and the decision-making units in the economy are in a simultaneous equilibrium.

Gross Domestic Product: Gross Domestic Product is the total value of all the final goods and services produced by all the enterprises within the domestic territory of a country in a particular year.

Gross National Product: Gross National Product is a measure of the value of goods and services that the nationals or residents of the country produce regardless of where they are located.

Hedging: Hedging is an attempt at covering the risk involved in a foreign exchange transaction through a forward transaction.

High-powered money: High-powered money is the money, which is produced by the government and the central bank and held in the hands of the public and the banks.

Imperfectly Anticipated Inflation: Imperfectly anticipated inflation is that inflation, which people do not expect.

Indexation: Indexation is a method by which there is an automatic adjustment of wages and prices according to the rate of inflation. Indexation reduces the reaction of people to inflation.

Indexed debt: Indexed debt is a debt where the interest payments are adjusted upwards every year to account for inflation.

Indicators: Indicators are those economic variables that are signals, which indicate to us whether we are moving closer to achieving the targets.

Indirect taxes: Indirect taxes are levied indirectly and include sales tax and excise tax. They are paid as a part of the price of the goods.

Induced investment: Investment that changes due to a change in income and the interest rate is called induced investment.

Inflation: Inflation is a persistent and an appreciable increase in the general level of prices.

Inflationary gap: The inflationary gap is the amount by which the aggregate demand exceeds the aggregate output at the full employment level.

Injection: Injection is an amount of money, which is spent by the different sectors in the economy and which is in addition to their incomes generated in the circular flow of income.

Interest: Interest is the price, which is paid by the borrower to the lender of borrowed funds.

Investment: Investment can be defined as the value of that portion of an economy’s output for any period of time that takes the form of new producer’s durable equipment, new structures and the change in inventories.

IS curve: The IS curve is a graphic representation of the goods market equilibrium showing the different combinations of the output levels and the interest rates at which saving equals investment (or planned spending is equal to income).

Labour force: Labour force consists of those people who are unemployed as well as those who are employed.

Life cycle hypothesis: The life cycle hypothesis puts forward the view that consumption is related to the present value of the individual’s income or wealth.

Liquidity: Liquidity can be defined as the ease with which an asset can be converted into cash at short notice and without any/least loss. Money is the only asset, which is perfectly liquid.

Liquidity trap: The liquidity trap is a situation when at some very low rate of interest all asset holders become bears.

LM curve: The LM curve is a graphic representation of the money market equilibrium showing the different combinations of the output levels and the interest rates at which the demand for money is equal to the supply of money.

Macroeconomics: Macroeconomics is the study of how the national economy as a whole grows and the changes that occur over time.

Macroeconomic policy: Macroeconomic policy refers to the action taken by the government through the different policies to achieve some macroeconomic objectives of the economy.

Marginal efficiency of investment schedule: The marginal efficiency of investment schedule depicts the relationship between the economy’s investment and rate of interest when the change in the price of capital goods is taken into consideration.

Marginal Propensity to Consume (MPC): The MPC is defined as the increase in the consumption per unit of increase in the income.

Marginal propensity to import: The marginal propensity to import is the fraction of any change in income that will be devoted to imports.

Microeconomics: Microeconomics is that branch of economics, which analyses the market behaviour and decision-making process of the individual consumers and firms.

Monetary policy multiplier: Monetary policy multiplier depicts the changes in the equilibrium level of income due to an increase in the real supply of money while keeping fiscal policy unchanged.

Monetary policy: Monetary policy is an operation by the monetary authorities of the country to achieve certain well-defined macroeconomic objectives.

Monetary transmission process: The mechanism by which the changes in the monetary policy affect the aggregate demand and, thus, the income level is called the monetary transmission process.

Money flows: Money flows include the monetary flows between the different sectors.

Money: Money is anything that is generally accepted as a means of payment in the settlement of transactions.

Moral suasion: Moral suasion is a combination of persuasion and pressures which a central bank asserts to bring the erring banks in line so that they function in accordance with the central bank’s directives.

Multiplier: The multiplier can be defined as the amount by which there occurs a change in the equilibrium level of income due to a change in autonomous aggregate expenditure by one unit.

National saving certificates: National saving certificates is a tax saving instrument for purposes of investing long-term savings available at all post offices in India being a combination of both high safety and adequate returns.

Natural rate of unemployment: Natural rate of unemployment is the average rate of unemployment around which any economy fluctuates in the long run. It is often known as NAIRU (Non-accelerating Inflation Rate of Unemployment).

Net Investment: Net investment is an accretion to the stock of capital.

Nominal GDP: Nominal GDP is the total of the value of the goods and services calculated at current prices.

Open economy: Open economy is an economy, which is engaged in trade with the rest of the world.

Open market operations: Open market operations are the sale and purchase of government securities and treasury bills by the central bank.

Overvaluation: Overvaluation of a currency is said to occur when the official value of a currency is fixed at a higher rate than what would have been determined by the free market forces of demand and supply.

Partial Equilibrium Approach: Partial equilibrium approach involves the determination of the equilibrium price and output in each market, ceteris paribus.

Perfectly Anticipated Inflation: Perfectly anticipated inflation exists when the rate of inflation is steady and perfectly predictable.

Permanent income hypothesis: According to the permanent income hypothesis, consumption is related to the permanent income.

Personal Income: Personal income is the income received by the households and the non-corporate businesses.

Phillips’ curve: Phillips’ curve shows that there exists an inverse relationship or trade-off between the rate of unemployment and the rate of increase in money wages or wage inflation.

Precautionary demand: The precautionary demand for money is the demand for cash by the public for contingencies, which may involve unexpected expenditures and opportunities.

Present value of a capital asset: The present value of a capital asset is the sum obtained after discounting the expected future yields over its entire life at the market rate of interest.

Private investment: Private investment refers to the investment in the private sector.

Production function: The production function describes input-output relationship.

Public investment: Public investment refers to the investment in the public sector.

Real flows: Real flows include the flows of the factors of production and the goods and services between the different sectors.

Real GDP: Real GDP is the total of the value of goods and services calculated at constant prices.

Relative income hypothesis: According to the relative income hypothesis, the fraction of a family’s income that will be allocated to consumption will depend on its income level relative to the income level of the other families with which it classifies itself.

Repo rate: Repo rate is the rate at which the central bank infuses short-term liquidity into the system.

Required reserves: Required reserves are cash balances which banks hold to meet their statutory reserve requirements.

Reserve deposit ratio: Reserve deposit ratio is the reserves held by the banks as a fraction of their deposits.

Reverse repo rate: Reverse repo rate is the rate at which banks park their short-term excess liquidity with the central bank in exchange for government securities.

Sacrifice ratio: Sacrifice ratio is the percentage of output, which is lost for a one point decrease in the inflation rate.

Saving account deposits: Savings account deposits are payable on demand and withdrawable by cheques, though the chequing facilities are limited and in addition they earn an interest.

Say’s law: The most famous tenet of Say’s law is ‘supply creates its own demand’.

Speculation: Speculation is an activity relating to the sale and purchase of foreign exchange in which risk is undertaken to take advantage of the fluctuations in the exchange rate.

Speculative demand for money: The speculative demand for money arises due to the existence of an uncertainty about the future.

Spot transaction: A spot transaction is one where the seller of the foreign exchange has to deliver the exchange to the buyer on the spot, that is, within two days of the deal.

Stagflation: Stagflation is a situation when an economy experiences a falling output (stagnation) and increasing prices (inflation).

Static Models: Static models are those models where the relationship between the different variables relates to the same period in time.

Statutory liquidity requirement: The statutory liquidity requirement is a statutory requirement where the banks are required to maintain a certain fixed proportion of their demand and time liabilities in the form of designated liquid assets.

Stock: Stock is a quantity, which is measured at a point in time.

Supply price of a capital asset: The supply price of a capital asset is the cost of replacing the capital asset, which is under consideration, with a new one.

Supply Shock: A supply shock is a sudden disturbance in the economy whose initial impact is a shift of the aggregate supply curve.

Sustained inflation: A sustained inflation takes place when the general price level continues to rise over a fairly long time period.

Time deposit ratio: Time deposit ratio is the ratio of time deposits to demand deposit.

Time deposits: Time deposits of banks are fixed-term deposits where the term of the deposit may vary and in addition they are not payable on demand.

Transactions demand for money: The transactions demand for money is the demand for cash by the public for carrying on its various current transactions.

Transfer payments: Transfer payments are those government payments, which do not involve any direct services by the recipient; for example, welfare payments, unemployment insurance and others.

Undervaluation: Undervaluation of a currency is said to occur when the official value of a currency is fixed at a lower rate than what would have been determined by the free market forces of demand and supply.

Unemployed: A person is unemployed if he is out of work and (a) has been actively looking for work during the previous four weeks, or (b) is waiting to be called back to a job after having been laid off.

Unemployment pool: The unemployment pool consists of the number of unemployed persons at any point of time.

Unilateral transfers: Unilateral transfers (also called unrequited transfers) are one way transactions as there is no claim involved as far as repayment is concerned, either at present or in the future.

Wholesale Price Index (WPI): Wholesale Price Index (WPI) or what is called the producer price index is used to measure the change in the average price of goods, which are traded in the wholesale market.

Withdrawal: Withdrawal is the income, which is generated in the production of the national output and which does not become a part of the circular flow of income.