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Aggregate Demand – is the sum of all planned expenditure in an economy.

Aggregate Supply – is the sum of all planned supply in an economy.

Autonomous components – A component which will never be zero regardless of income as certain spending is necessary. This will be financed through borrowing or by depleting savings.

Base Rate – The interest rate set by the Bank of England. This is the rate at which they pay interest on banks' deposits with the Bank of England. Therefore this rate in effect helps to determine the interest rate in the wider economy and the rate at which banks charge interest.

BoE – The Bank of England.

Conduit - In financial economics a conduit is a mechanism used by banks to store mortgages, waiting to be packaged and securitised into financial instruments and then sold on to investors, the reason they exist is because they are 'off the books' - they are not included on the balance sheet, and therefore the banks don't have to set aside as much in reserve.

Deciles Marks boundaries between 10% band widths.

Fiscal Policy – Decisions made by the government on its expenditure, taxation and borrowing which will affect the wider economy.

Hot Money – Money moved from one country to another in order to make a profit through accumulated interest or through the exchange rate. 

Heuristics - heuristics is a behavioural economic concept which is 

Investment – Expenditure undertaken by firms, government or another agency to add to the capital stock.

Frictional Unemployment - unemployment which arises because a worker is in between jobs. 

Labour Force - the number of people who are employed or considered unemployed. To be an unemployed member of the labour force, one has to be actively seeking work.

Lagging Indicator - an indicator of the state of the economy which isn't real time, i.e. the data from the indicator shows the state of the economy a few months prior to the release of the data. Unemployment is one example of a lagging indicator.

LIBOR – London Inter-Bank Offered Rate; the rate at which banks pay to lend to each other.

Monetary Policy – The decisions made by the government regarding monetary variables such as the money supply or the interest rate.

Moral Hazard - is an issue which arises when a party is insured and hence takes risks they may not previously have done (if they were uninsured) incurring costs for the insurer. Moral Hazard is case of asymmetric information, whereby the insurer doesn't know how pre-cautious the insuree will be. Some examples of moral hazards; banks lending recklessly because they are insured by deposit-insurance and the central bank will act as a lender-of-last resorts; a person who has house insurance may be less careful around the house, as they know they can claim damaged goods on the insurance; and a final example, drivers increasing their speed because of the invention of seatbelts.

MPC – Monetary Policy Committee.

Myopia occurs when firms under invest in capital and labour because they have a poor (or unfounded) estimation of long run demand in the economy. In order words they have a short-sighted take on investment based on investment now.

Can also be used as an argument against Ricardian Equivalence, whereby it holds that basically consumers are too short-sighted to realise that tax cuts now will have to be funded by tax increases in the future, this may be because the heuristics they use when making their consumer decisions don't think that far into the future.

National Savings - the sum of private and public savings.

Output Gap – The difference between actual real GDP and potential real GDP.

QE – Quantitative Easing; also known as Asset Purchasing Scheme. A scheme where the Bank of England purchases government debt (Guilts) off of institutional investors and banks in order to drive the interest rate on government bonds down (making it easier and cheaper for the government to borrow), lower interest rates throughout the economy, and encourage banks to lend or purchase other assets perhaps inducing a positive wealth effect on the economy.

Quintile – Marks boundaries between 20% band widths.

Real Actual Economic Growth – An increase in GDP after inflation.

Real Potential Economic Growth – An increase in the potential output (an outward shift in the PPF curve and in the long run aggregate supply curve) above the rate of inflation. Also known as real economic growth.

Recession – A period of 2 or more quarters of negative growth.

Structured Investment Vehicle (SIV) - Is similar to a conduit, but is used to store securitised mortgages, whilst a buyer is found. Again, like a conduit, SIVs are used by a bank so it has to maintain less in reserve.

Underemployment – Is a situation in which a worker is only working part-time, although they wish to work full time, but cannot do so. It also includes those who are over-qualified for a job but can’t find employment elsewhere.

Unemployment - a situation where someone is unable to find employment despite being a member of the workforce and actively seeking work.

Page last updated on 23/01/14