Glossary

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Glossary Entries
Word(s)	Definition	Image	Caption	Link	Source
AA-DD model	Represents a synthesis of the foreign exchange market, the money market, and the goods and services market, showing their interconnectedness.
AA-DD model	Represents a synthesis of the foreign exchange market, the money market, and the goods and services market, showing their interconnectedness.
Arbitrage	The process of buying a product when its price is low and then reselling it after its price rises to make a profit.
Arbitrage	The process of buying a product when its price is low and then reselling it after its price rises to make a profit.
balance of payments deficit	The balance on the balance of payments when the central bank buys domestic currency and sells foreign reserves.
balance of payments deficit	The balance on the balance of payments when the central bank buys domestic currency and sells foreign reserves.
Bimetallic standard	A currency standard using both gold and silver.
Bretton Woods Conference	A monetary conference held in 1944 in Bretton Woods, New Hampshire, that laid the groundwork for the establishment of the World Bank and the IMF.
Bretton Woods Conference	A monetary conference held in 1944 in Bretton Woods, New Hampshire, that laid the groundwork for the establishment of the World Bank and the IMF.
Bretton Woods system	The fixed exchange rate system (using a gold exchange standard) set up after World War II and lasting until 1973.
Bretton Woods system	The fixed exchange rate system (using a gold exchange standard) set up after World War II and lasting until 1973.
business cycle	The term used to describe the cyclical pattern of economic expansions and contractions over time.
business cycle	The term used to describe the cyclical pattern of economic expansions and contractions over time.
capital controls	Any type of government restriction on international financial, or capital, transactions. This may include taxes on financial transactions or regulations specifying whether foreign citizens can buy domestic assets or in what quantities.
capital controls	Any type of government restriction on international financial, or capital, transactions. This may include taxes on financial transactions or regulations specifying whether foreign citizens can buy domestic assets or in what quantities.
capital flight	Refers to investors purchasing assets abroad in anticipation of an imminent currency devaluation or depreciation, often in the midst of a balance of payments crisis.
capital flight	Refers to investors purchasing assets abroad in anticipation of an imminent currency devaluation or depreciation, often in the midst of a balance of payments crisis.
capital flight	Refers to investors purchasing assets abroad in anticipation of an imminent currency devaluation or depreciation, often in the midst of a balance of payments crisis.
capital flight	Refers to investors purchasing assets abroad in anticipation of an imminent currency devaluation or depreciation, often in the midst of a balance of payments crisis.
certificate of deposit (CD)	A type of deposit that provides a higher rate of interest to the depositor in return for a promise to keep the money deposited for a fixed amount of time.
certificate of deposit (CD)	A type of deposit that provides a higher rate of interest to the depositor in return for a promise to keep the money deposited for a fixed amount of time.
ceteris paribus	Means that all other exogenous variables are maintained at their original values when a change in one exogenous variable takes place.
ceteris paribus	Means that all other exogenous variables are maintained at their original values when a change in one exogenous variable takes place.
consumer price index (CPI)	An index that measures the average level of prices of goods and services in an economy relative to a base year.
consumer price index (CPI)	An index that measures the average level of prices of goods and services in an economy relative to a base year.
Contractionary fiscal policy	A decrease in government spending or transfer payments and/or an increase in tax revenues.
Contractionary fiscal policy	A decrease in government spending or transfer payments and/or an increase in tax revenues.
contractionary monetary policy	A decrease in the money supply in a country.
contractionary monetary policy	A decrease in the money supply in a country.
Currency appreciation	A currency appreciates with respect to another when its value rises in terms of the other.
Currency appreciation	A currency appreciates with respect to another when its value rises in terms of the other.
Currency depreciation	A currency depreciates with respect to another when its value falls in terms of the other.
Currency depreciation	A currency depreciates with respect to another when its value falls in terms of the other.
debtor country	A country whose total domestic liabilities held by foreigners exceeds total domestic assets held abroad.
debtor country	A country whose total domestic liabilities held by foreigners exceeds total domestic assets held abroad.
discount rate	Interest rate charged on the loans that the Federal Reserve Bank lends on a short-term basis (usually overnight) to financial institutions.
discount rate	Interest rate charged on the loans that the Federal Reserve Bank lends on a short-term basis (usually overnight) to financial institutions.
disposable income	All the income households have at their disposal to spend. It is defined as national income (GNP), minus taxes taken away by the government, plus transfer payments that the government pays out to people.
disposable income	All the income households have at their disposal to spend. It is defined as national income (GNP), minus taxes taken away by the government, plus transfer payments that the government pays out to people.
dollarization	Currency fixing by adopting the U.S. dollar as one’s currency.
dollarization	Currency fixing by adopting the U.S. dollar as one’s currency.
domestic spending (DS)	The sum of domestic consumption, investment, and government spending. Often used as a proxy for national welfare.
domestic spending (DS)	The sum of domestic consumption, investment, and government spending. Often used as a proxy for national welfare.
economic recession	Refers to a decline in a country’s measured real gross domestic product (GDP) over a period usually coupled with an increasing aggregate unemployment rate.
economic recession	Refers to a decline in a country’s measured real gross domestic product (GDP) over a period usually coupled with an increasing aggregate unemployment rate.
exchange rate (ER)	Represents the number of units of one currency that exchanges for a unit of another.
exchange rate (ER)	Represents the number of units of one currency that exchanges for a unit of another.
Exchange Rate Mechanism	An exchange rate system used within the European Union to maintain exchange rates within a specific band around a predetermined central exchange rate.
Exchange Rate Mechanism	An exchange rate system used within the European Union to maintain exchange rates within a specific band around a predetermined central exchange rate.
Exchange rate overshooting	Occurs when an exchange rate, in the process of adjusting to a new equilibrium, either rises above the final equilibrium value before falling back again, or falls below the final equilibrium value before rising up again.
Exchange rate overshooting	Occurs when an exchange rate, in the process of adjusting to a new equilibrium, either rises above the final equilibrium value before falling back again, or falls below the final equilibrium value before rising up again.
Exchange rate risk	Occurs when the profit in trade or the rate of return on an international investment can fall quickly because of a change in the exchange rate.
Exchange rate risk	Occurs when the profit in trade or the rate of return on an international investment can fall quickly because of a change in the exchange rate.
Expansionary monetary policy	An increase in the money supply in a country.
Expansionary monetary policy	An increase in the money supply in a country.
federal funds rate	The interest rate banks charge each other for short-term (usually overnight) loans.
federal funds rate	The interest rate banks charge each other for short-term (usually overnight) loans.
Federal Reserve Bank	The U.S. central bank that controls money supply in the country.
Federal Reserve Bank	The U.S. central bank that controls money supply in the country.
financial account	A record of all international transactions for assets.
financial account	A record of all international transactions for assets.
fixed exchange rates	An exchange rate system in which the rate is fixed at a specified value by the government.
fixed exchange rates	An exchange rate system in which the rate is fixed at a specified value by the government.
floating exchange rate	An exchange rate system in which the rate fluctuates, or floats, because it is determined by supply and demand in the private market.
floating exchange rate	An exchange rate system in which the rate fluctuates, or floats, because it is determined by supply and demand in the private market.
foreign exchange reserves	Holdings of foreign assets by a country’s central bank. Usually held in the form of foreign government Treasury bonds.
foreign exchange reserves	Holdings of foreign assets by a country’s central bank. Usually held in the form of foreign government Treasury bonds.
forward discount	When the forward exchange rate is such that a forward trade costs less (or buys more foreign currency) than a trade on the spot market today.
forward discount	When the forward exchange rate is such that a forward trade costs less (or buys more foreign currency) than a trade on the spot market today.
forward exchange rate	The rate that appears on a contract to exchange currencies either 30, 60, 90, or 180 days in the future.
forward exchange rate	The rate that appears on a contract to exchange currencies either 30, 60, 90, or 180 days in the future.
gold exchange standard	When all countries fix to one central reserve currency, while the reserve currency is fixed to gold.
gold exchange standard	When all countries fix to one central reserve currency, while the reserve currency is fixed to gold.
gold reserves	Gold held in storage by a central bank, usually to make possible the exchange of currency for gold under a gold standard.
gold reserves	Gold held in storage by a central bank, usually to make possible the exchange of currency for gold under a gold standard.
Gold standard	A currency standard in which currency is fixed to a weight of gold, and the central bank freely exchanges gold for currency with the public.
Gold standard	A currency standard in which currency is fixed to a weight of gold, and the central bank freely exchanges gold for currency with the public.
Goods and Services Account	A record of all international transactions for goods and services only.
Goods and Services Account	A record of all international transactions for goods and services only.
government budget deficit	When total expenditures by a government exceed its total tax revenue collections during a year.
government budget deficit	When total expenditures by a government exceed its total tax revenue collections during a year.
gross domestic product (GDP)	Measures the total value of all goods and services produced by a country during a year.
gross domestic product (GDP)	Measures the total value of all goods and services produced by a country during a year.
gross domestic product (GDP)	Measures the total value of all goods and services produced by a country during a year.
gross domestic product (GDP)	Measures the total value of all goods and services produced by a country during a year.
gross domestic product (GDP)	Measures the total value of all goods and services produced by a country during a year.
gross domestic product (GDP)	Measures the total value of all goods and services produced by a country during a year.
gross national product (GNP)	A measure of national income that includes all production by citizens that occurs anywhere in the world. It is measured using the current account balance for exports and imports.
gross national product (GNP)	A measure of national income that includes all production by citizens that occurs anywhere in the world. It is measured using the current account balance for exports and imports.
hedging	The process of protecting oneself from the riskiness of exchange rate movements; one method is by entering into a forward contract.
hedging	The process of protecting oneself from the riskiness of exchange rate movements; one method is by entering into a forward contract.
IMF conditionality	Conditions that countries must promise to fulfill to receive a loan from the IMF. Conditions can include requirements to reduce government budget deficits, suggestions for privatization of state-owned enterprises, and strict controls on monetary expansion.
IMF conditionality	Conditions that countries must promise to fulfill to receive a loan from the IMF. Conditions can include requirements to reduce government budget deficits, suggestions for privatization of state-owned enterprises, and strict controls on monetary expansion.
inflation rate	The rate of change in the general level of prices in an economy. Alternatively, the percentage change in the consumer price index over a period.
inflation rate	The rate of change in the general level of prices in an economy. Alternatively, the percentage change in the consumer price index over a period.
interest rate parity theory	A theory of exchange rate determination based on investor motivations in which equilibrium is described by the interest rate parity condition.
interest rate parity theory	A theory of exchange rate determination based on investor motivations in which equilibrium is described by the interest rate parity condition.
international investment position (IIP)	A measure of the difference between the total value of domestic holdings of foreign assets and the value of foreign assets held in the domestic country.
international investment position (IIP)	A measure of the difference between the total value of domestic holdings of foreign assets and the value of foreign assets held in the domestic country.
international investment position (IIP)	A measure of the difference between the total value of domestic holdings of foreign assets and the value of foreign assets held in the domestic country.
international investment position (IIP)	A measure of the difference between the total value of domestic holdings of foreign assets and the value of foreign assets held in the domestic country.
International Monetary Fund (IMF)	The international organization created after World War II to oversee the Bretton Woods system of fixed exchange rates.
International Monetary Fund (IMF)	The international organization created after World War II to oversee the Bretton Woods system of fixed exchange rates.
International Monetary Fund (IMF)	The international organization created after World War II to oversee the Bretton Woods system of fixed exchange rates.
International Monetary Fund (IMF)	The international organization created after World War II to oversee the Bretton Woods system of fixed exchange rates.
iso-CAB line	A line drawn on an AA-DD diagram representing a set of points along which the current account balance (CAB) is the same.
iso-CAB line	A line drawn on an AA-DD diagram representing a set of points along which the current account balance (CAB) is the same.
J-curve effect	A theory that suggests that after a currency depreciation, the current account balance will first fall for a period of time before beginning to rise as is normally expected.
J-curve effect	A theory that suggests that after a currency depreciation, the current account balance will first fall for a period of time before beginning to rise as is normally expected.
Keynesian cross diagram	Depicts the equilibrium level of national income in the G&S market model.
Keynesian cross diagram	Depicts the equilibrium level of national income in the G&S market model.
Liquidity	Refers to the degree to which an asset is quickly and easily exchangeable for goods and services. For example, currency is highly liquid, but real estate is not liquid.
Liquidity	Refers to the degree to which an asset is quickly and easily exchangeable for goods and services. For example, currency is highly liquid, but real estate is not liquid.
marginal propensity to consume	The additional amount of aggregate consumption that arises from an additional dollar of national income.
marginal propensity to consume	The additional amount of aggregate consumption that arises from an additional dollar of national income.
marginal propensity to save (mps)	The additional saving that occurs with an additional dollar of disposable income.
marginal propensity to save (mps)	The additional saving that occurs with an additional dollar of disposable income.
Monetary autonomy	Refers to the independence of a country’s central bank to affect its own money supply and conditions in its domestic economy.
Monetary autonomy	Refers to the independence of a country’s central bank to affect its own money supply and conditions in its domestic economy.
Money demand	Refers to the demand by households, businesses, and the government, for highly liquid assets such as currency and checking account deposits.
Money demand	Refers to the demand by households, businesses, and the government, for highly liquid assets such as currency and checking account deposits.
money market model	A model showing how the supply of money and the demand for money combine to affect the equilibrium interest rate in an economy.
money market model	A model showing how the supply of money and the demand for money combine to affect the equilibrium interest rate in an economy.
national debt	The total value of government debt outstanding at a point in time. Alternatively, the sum total face value of government bonds that have been sold but not yet redeemed.
national debt	The total value of government debt outstanding at a point in time. Alternatively, the sum total face value of government bonds that have been sold but not yet redeemed.
natural rate	Defined as the unemployment rate that does not cause inflationary pressures in the economy.
natural rate	Defined as the unemployment rate that does not cause inflationary pressures in the economy.
official reserve transactions	Account on the balance of payments used to record all central bank transactions.
official reserve transactions	Account on the balance of payments used to record all central bank transactions.
open market operation (OMO)	Refers to Fed purchases or sales of U.S. government Treasury bonds or bills. Used as a way to control the money supply.
open market operation (OMO)	Refers to Fed purchases or sales of U.S. government Treasury bonds or bills. Used as a way to control the money supply.
open market operations	Refers to central bank purchases or sales of U.S. government Treasury bonds or bills.
open market operations	Refers to central bank purchases or sales of U.S. government Treasury bonds or bills.
PPP exchange rate	The exchange rate that equalizes the cost of a market basket of goods between two countries.
PPP exchange rate	The exchange rate that equalizes the cost of a market basket of goods between two countries.
Purchasing power parity (PPP)	A theory of exchange rate determination based on traders’ motivations that result in a PPP exchange rate when there are no transportation costs and no differential taxes applied.
Purchasing power parity (PPP)	A theory of exchange rate determination based on traders’ motivations that result in a PPP exchange rate when there are no transportation costs and no differential taxes applied.
Rate of return (RoR)	The percentage change in the value of an asset over some period.
Rate of return (RoR)	The percentage change in the value of an asset over some period.
real exchange rate	A measure of the cost of a market basket of goods abroad relative to the cost of a similar basket domestically. It captures differences in prices, converted at the spot exchange rate, between the domestic country and the rest of the world.
real exchange rate	A measure of the cost of a market basket of goods abroad relative to the cost of a similar basket domestically. It captures differences in prices, converted at the spot exchange rate, between the domestic country and the rest of the world.
real sector	The sector of an economy where goods and services are produced.
real sector	The sector of an economy where goods and services are produced.
relative PPP theory	A dynamic version of the PPP theory that relates currency appreciation or depreciation to differences in inflation rates between countries.
relative PPP theory	A dynamic version of the PPP theory that relates currency appreciation or depreciation to differences in inflation rates between countries.
revaluations	When the government raises the value of its currency with respect to the reserve currency or to gold in a fixed exchange rate system.
revaluations	When the government raises the value of its currency with respect to the reserve currency or to gold in a fixed exchange rate system.
Smithsonian Agreement	A 1971 agreement meant to salvage the Bretton Woods system of fixed exchange rates.
Smithsonian Agreement	A 1971 agreement meant to salvage the Bretton Woods system of fixed exchange rates.
special drawing rights	A composite currency created by the International Monetary Fund (IMF), used only for transactions between central banks.
special drawing rights	A composite currency created by the International Monetary Fund (IMF), used only for transactions between central banks.
spot exchange rate	The exchange rate that prevails on the spot, that is, for trades to take place immediately.
spot exchange rate	The exchange rate that prevails on the spot, that is, for trades to take place immediately.
stagflation	An economic situation characterized by low or negative GDP growth together with high inflation.
stagflation	An economic situation characterized by low or negative GDP growth together with high inflation.
sterilized foreign exchange intervention	Occurs when a central bank counters direct intervention in the Forex with a simultaneous offsetting transaction in the domestic bond market.
sterilized foreign exchange intervention	Occurs when a central bank counters direct intervention in the Forex with a simultaneous offsetting transaction in the domestic bond market.
superequilibrium	Describes the GNP level and exchange rate value at the intersection of the AA and DD curves. It represents the values that provide for equilibriums in the money market, the Forex market, and the G&S market simultaneously.
superequilibrium	Describes the GNP level and exchange rate value at the intersection of the AA and DD curves. It represents the values that provide for equilibriums in the money market, the Forex market, and the G&S market simultaneously.
trade deficit	Occurs when the value of imports exceeds the value of exports during a year.
trade deficit	Occurs when the value of imports exceeds the value of exports during a year.
transfer payments	Government expenditures made to individuals or businesses without any good or service received in exchange. It includes social insurance payments, welfare payments and unemployment compensation.
transfer payments	Government expenditures made to individuals or businesses without any good or service received in exchange. It includes social insurance payments, welfare payments and unemployment compensation.
Triffin dilemma	The problem of excessive U.S. dollar holdings by foreign central banks.
Triffin dilemma	The problem of excessive U.S. dollar holdings by foreign central banks.
twin-deficit identity	Shows the relationship between a country’s government budget deficit and a country’s current account deficit. It says that the sum of net private saving (S_p − I) and the current account deficit must equal the government budget deficit.
twin-deficit identity	Shows the relationship between a country’s government budget deficit and a country’s current account deficit. It says that the sum of net private saving (S_p − I) and the current account deficit must equal the government budget deficit.
wage-price spiral	A process over time in which rising prices cause workers to demand higher wages that in turn leads firms to raise their prices, and so on.
wage-price spiral	A process over time in which rising prices cause workers to demand higher wages that in turn leads firms to raise their prices, and so on.
Washington Consensus	A set of free market-oriented policies often prescribed by the IMF as a part of its conditions for countries to receive a structural adjustment loan.
Washington Consensus	A set of free market-oriented policies often prescribed by the IMF as a part of its conditions for countries to receive a structural adjustment loan.
World Trade Organization (WTO)	An international agency whose purpose is to monitor and enforce the Uruguay Round trade liberalization agreements and to promote continuing liberalizing initiatives with continuing rounds of negotiation.
World Trade Organization (WTO)	An international agency whose purpose is to monitor and enforce the Uruguay Round trade liberalization agreements and to promote continuing liberalizing initiatives with continuing rounds of negotiation.