IB Economics 3.5 Demand Management - Monetary Policy Key Definitions

The institution responsible for a country's monetary system. It issues currency, regulates and supervises commercial banks, acts as banker to the government, and conducts monetary policy.

The process by which commercial banks expand the money supply by making loans, since each new loan creates a new deposit.

A strategy where central banks set a specific inflation rate as their primary goal and adjust monetary policies respectively to meet the goal.

The cost of borrowing money, and the reward for saving, expressed as a percentage of the amount borrowed or saved.

The interest rate the central bank charges commercial banks to borrow reserves. Changing it shifts the cost of credit throughout the economy.

Monetary policy is a demand-side policy in which the central bank influences aggregate demand by adjusting interest rates and the money supply.

The money multiplier is a concept that quantifies the total amount of money created in the economy from an initial deposit.

The market interest rate before inflation is taken into account.

The buying and selling of government bonds by the central bank to change the money supply and influence interest rates.

The value of the next best option that must be forgone or sacrificed in order to acquire something else.

A monetary policy where the central bank purchases financial assets from the market to increase the money supply.

The interest rate which has been adjusted for inflation.

The fraction of deposits that commercial banks must hold as reserves rather than lend out, as set by the central bank.