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Glossary

Aggregate demand: Total spending on final goods and services III an economy in a given

period.

Aggregate supply: Value of total production of final goods and services in an economy in a

given period.

Appreciation: An increase in the value of a currency in relation to another currency. Holds true

in a flexible exchange rate regime.

Automatic stabilizer : A system through which government expenditure and taxes automatically

provide a cushion against fluctuations in income.

Autonomous variable: Variables which determine aggregate demand independently of

macroeconomic policies like sentiment, expectations, gut feeling etc.

Bank rate: The rate at which the central bank lends to the commercial banks.

Balance of payments: A statement, which shows all transactions of a country with the rest of

the world in a given period.

Balance of trade: A statement showing transaction of a country with the rest of the world in

respect of merchandise only in a given period.

Balance sheet: A record of assets and liabilities of an economic unit.

Boom: When the actual growth of GDP (aggregate demand) has a tendency to outpace the

potential growth.

Bubble: When asset prices are driven up based on future expectations or speculative motive and

not on fundamentals.

Call money market rate: The rate at which one bank borrows from the other.

Capacity output: The maximum level of output which can be produced when all factors of

production are fully employed.

Capital account : Record of a country's assets transactions with the rest of the world.

Capital account convertibility : When for all transactions on capital account of the balance of

payment the currency is fully convertible.

Capital adequacy norms: Norms that guide a bank's amount and funding structure depending

on their assets.

Capital controls: Controls on the free movement of capital in and out of the country.

Capital stock: Stock of equipments, buildings and structure used in production at any point of

time.

Cash reserve ratio: A requirement that banks must hold a proportion of their total deposits in

the form of cash reserves.

Central bank: An apex bank, which is in charge of the conduct of monetary policy in the

country.

Consumption: Total spending on goods and services by the consumers.

Cost of capital: The cost of acquiring capital, given by interest rate, depreciation and expected

inflation rate.

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Credibility: The extent to which people perceive that government's policy announcements can

be believed.

Crowding out: Decrease in private investment consequent to excessive government borrowing

from the market.

Currency deposit ratio: Ratio of currency to bank deposits. Affects the size of money multi plier.

Currency overvaluation : When the exchange rate between the local and foreign currency is

valued by the central bank at a level that is much higher than what would prevail if the exchange

rate were market determined.

Currency undervaluation: When the exchange rate between the local and foreign currency is

valued by the central bank at a level that is much lower than what would prevail if the exchange

rate were market determined.

Current account : The part of the balance of payments account that records non- capital

transactions.

Current account convertibility: When for all transactions on current account of balance of

payments the currency is fully convertible.

Debt sustainability: Refers to movements in debt- GDP ratio. If debt- GDP ratio is rising debt is

unsustainable and vice versa.

Deflator: A price index that converts nominal numbers to real ones.

Demand management: Management of aggregate demand for goods and services in an

economy consistent with the supply capacity of the economy.

Depreciation: A decrease in the value of one currency in relation to the other. Holds true in a

flexible exchange rate regime.

Depression: It is a deeper recession

Devaluation: A fall in the value of a currency in relation to other, effected by the central bank of

the country to correct balance of payment disequilibria. Valid in a fixed exchange rate regime.

Discretionary policy: Where, instead of following fixed government or the central bank uses its

discretion to frame influence aggregate demand.

Disposable income: Personal income minus taxes. Divided between consumpt ion and saving.

Effective exchange rate: An index that gives the weighted average value of an exchange rate

against several other countries.

Exchange rate: The price of one currency against the other. Also called the nominal exchange

rate.

Expectation driven variables: When consumer sentiments, business optimism/pessimism areprimary drivers of aggregate demand.

Fiat money: Money that is valued on account of backing of government legislation/ fiat rather

than its intrinsic value.

Final good: What is sold directly to the final consumer.

Financial crisis: When banks become insolvent.

Financial liberalization: When financial sector is opened tip to improve competition and

efficiency.

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Financial repression: When controls are imposed on the financial sector posing obstacles in its

efficient functioning. Usually follows government's desire to raise cheap money.

Financial sector reforms: Setting up norms and institutions to facilitate fair competition in the

financial markets.

Fiscal deficit: Difference between the government's total expenditure and its own receipts.

Fiscal policy: Has three components: government expenditure, government debt and taxes.

Through changes in these, fiscal policy influences aggregate demand.

Fiscal responsibility and budget management bill: A bill passed in the Indian parliament to

contain government's fiscal deficit within a specified limit by 2009.

Fixed exchange rate: When the government fixes exchange rate between countries and the rate

is maintained through central bank intervention in the currency market.

Flexible exchange rate: An exchange rate between one currency and the other that is

determined solely based on demand for and supply of the currencies in the market place.

Flow variable: A variable that is measured per unit of time.

Foreign exchange Intervention: When the central bank buys and sells foreign exchange in the

currency market to tame exchange rate fluctuations.

Gross domestic product: Market value of all final goods and services produced in an economy

over a specified period.

Gross investment: Addition to the stock of capital in a country during a particular period.

Human development index: A broad measure of welfare of the people prepared by the United

Nations, which includes, in addition to GDP, indicators of health and education.

Inflation: A continuous rise in the general price level in an economy and a consequent fall in the

purchasing power of money.

Interest rate : It is the price charged for borrowed money. Also called the nominal interest rate.

Kelkar committee report: A committee set up to look into Indias tax reforms.

M1, M3: Different measures of the aggregate stock of money in Indian economy. M I is narrow

money and M3 is broad money and is, therefore, larger in value.

Marginal propensity to consume: Change in consumption expenditure in response to a change

in disposable income.

Monetary base: Also called 'high powered money' or 'reserve money' consists of currency with

public and banks' deposits with the central bank.

Monetary policy: A policy tool through which the central bank influences the aggregate demand

for goods and services in the economy by changing the money supply and thereby the interest

rates.

Money multiplier: Ratio of money stock to monetary base.

Mundell- Fleming model: Explores economies with free capital mobili ty and flexible exchange

rates

Net investment : Gross investment minus depreciation (consumption of capital).

Open market operations: Purchase and sale of government securities in the market by the

central bank with the objective of controlling the money supply.

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Policy induced variables: Refer to macroeconomic policy variables like tax rates and interest

rates ete., which can induce change in aggregate demand for goods and services in an economy.

Primary deficit: Fiscal deficit minus interest payments

Prime lending rate: Rate at which the banks lend to their most favoured customers.

Purchasing power parity: Parity between two currencies at an exchange rate that will give eachcurrency the same purchasing power in its own economy.

Real exchange rate: Nominal exchange rate multiplied by the ratio of foreign prices to domestic

prices.

Real interest rate: Nominal interest rate minus the expected inflation rate.

Recession: It is a deeper slowdown

Repo transactions: Central bank's purchase of government securities from the banks with an

agreement that the securities will be bought back by the banks at a later date at a specified rate.

Reserves: Money that banks do not lend but keep partly as vault cash and partly as deposits

with the central bank.

Revaluation: A rise in the value of a currency in relation to other, effected by the central bank of

the country to correct balance of payment disequilibria. Valid in a fixed exchange rate regime.

Revenue deficit: The difference between the government's revenue (current) expenditure and

revenue (current) receipts.

Reverse repo transactions: Central bank's sale of government securities to the banks with an

understanding that it will buy back the securities from the banks at a later date at a specified

rate.

Saving: What is left out of disposable income after consumption.

Slowdown: When the actual growth of GDP (aggregate demand) is less than the potentialgrowth.

Structural variables: Refer to rigidities in the structure of an economy which come in the way of

more spending on goods and services in the economy.

Sterilization: A means to neutralize the- inflationary/deflationary effects of central bank's

intervention in the currency market.

Value added: The value added to goods and services at each stage of production or rendering

of service.

Velocity of circulation: The number of times the money is spent on GDP in a given period,

given by the ratio of nominal GDP to nominal money stock.

Wealth: Sum of value of assets and money held by a household.

Wealth effect: A change in the aggregate demand consequent to change in the wealth of the

household.

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