Economics Definitions Unit 2

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microeconomics
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the study of the behavior of individuals or groups within an economy typically within market context
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macroeconomics
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the study of the economy as a whole including inflation growth and unemployment
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circular flow of income
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a model of the economy which shows the flow of goods services and factors and their payments around the economy
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closed economy
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an economy where there is no foreign trade
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GDP and GNP
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measures of national income which exclude and include respectively net income from investments abroad but do not include an allowances for depreciation of the nations capital stock
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informal economy
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economic activity where trade and exchange take place but which goes unreported to the tax authorities and those collecting national income statistics. Workers are usually motivated by tax evasion
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injections
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spending which is not generated by households including investment, govt spending and exports
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national income
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the value of the output expenditure or income of an economy over a period of time
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open economy
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an economy where this is trade with other countries
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purchasing power parities
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an exchange rate of one currency for another which compares how much a typical basket of goods in one country costs compared that of another country
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transfer payments
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income for which there is no corresponding output such as unemployment benefits or pension payments
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wealth
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a stock of assets which can be used to generate a flow of production or income
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withdrawals or leakages
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in the circular flow of income spending by households which does not flow back to domestic firms including saving taxes and imports
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business or economic or trade cycle
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regular fluctuations in the level of economic activity around the productive potential of the economy from recessions operating below productive potential to booms operating above productive potential
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economic growth
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growth in the productive potential of the economy typically measured by growth in real GDP
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economic recovery
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the movement back from where the economy is operating below its productive potential to a point where it is at its productive potential
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output gap
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the difference between the actual level of GDP and the productive potential of the economy. When actual GDP is above the productive potential of the economy there is a boom and a positive output gap
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sustainable growth
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growth in the productive potential of the economy today which doesn’t lead to a fall in the productive potential of the economy for future generations
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the economics of happiness
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investigates exactly what contributes to welfare and attempts to put values on some of these factors
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activity or participation rates
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the percentage or proportion of any given population in the labour force
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cyclical, demand-deficient or Keynesian unemployment
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where there is insufficient demand in the economy for all workers who wish to work at current wage rate to obtain a job
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frictional unemployment
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when workers are unemployed for short lengths of time between jobs
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net migration
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immigration minus emigration
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seasonal unemployment
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when workers are unemployed at certain times of the year
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structural unemployment
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when the pattern of demand and production changes leaving workers unemployed in labour markets where demand has shrunk eg regional unemployment, sectoral unemployment or technological unemployment
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consumer price index
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a measure of the price level used across the eu and used by the Bank of England to measure inflation against its target
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cost-push inflation
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inflation caused by increases in the costs of production in the economy
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creeping inflation
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small rises in price level over a long period of time
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deflation
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a fall in price level
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demand-pull inflation
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inflation caused by excess demand in the economy
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headline rate of inflation
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the increase in consumer prices including all housing costs known as the RPI in the uk
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hyperinflation
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large increases in the price level
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indexation
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adjusting the value of economic variables such as wages or the rate of interest in line with inflation
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inflation
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a general rise in prices
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price level
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the average price of goods and services in the economy
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Retail Price Index (RPI)
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a measure of the price level
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underlying rate of inflation
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the RPIX the increase in consumer prices excluding changes in mortgage costs or the RPIY which also excludes indirect taxes
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balance of payments account
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a record of all financial dealings over a period of time between economic agents of one country and all other countries
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balance of trade
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visible exports minus visible imports
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capital and financial accounts
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the part of the balance of payments account where flows of saving investment and currency are recorded
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current account
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the part of the balance of payments accounts where payments for the purchase and sale of goods and services are recorded
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current balance
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the difference between total exports and total imports or the balance of trade and the balance of invisible trade
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current account deficit or surplus
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a deficit exists when imports are greater than exports. A surplus exists when exports are greater than imports
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invisibles
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trade in services, transfers of income and other payments or receipts
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visibles
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trade in goods
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average propensity to consume
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the proportion of total income spent calculated by C/Y
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average propensity to save
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the proportion of a total income which is saved calculated by S/Y
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consumption
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total expenditure by households on goods and services over a period of time
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disposable income
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household income over a period of time including state benefits and less direct taxes
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durable goods
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goods which are consumed over a long period of time
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marginal propensity to consume
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the proportion of a change in income which is spent calculated by change in C/change in Y
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marginal propensity to save
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the proportion of change in income which is saved calculated by change in S/change in Y
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non-durable goods
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goods which are consumed almost immediately
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permanent income
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the income a household could spend over its lifetime without reducing the value of its assets approximating to the average income of a household over its lifetime
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savings function
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the relationship between the saving of households and the factors which determine it
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saving (personal)
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the proportion of a households’ disposable income which is not spent over a period of time
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wealth effect
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the change in consumption following a change in wealth
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investment
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the addition to the capital stock of the economy
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retained profits
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profit kept back by a firm for its own use which is not distributed to shareholders or used to pay taxation
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aggregate
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the sum or total
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aggregate demand
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the total of all demands or expenditures in the economy at any given time
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aggregate demand curve
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shows the relationship between price level and equilibrium nation income. As the price level rises the equilibrium level of national income falls
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domestic economy
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the economy of a single country
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multiplier
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an increase in investment or any other autonomous expenditure will lead to an even greater increase in income
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aggregate supply curve
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the relationship between the average level of prices in the economy and the level of total output
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full capacity
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the level of output where no extra production can take in the long run with existing resources as shown by the classical long run aggregate supply curve
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long run aggregate supply curve
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the aggregate supply curve which assumes that wage rates are variable both upwards and downwards. Classical supply side economists assume that wage rates are flexible. Keynesian economists assume that wage rates are strictly downwards and hence the economy may operate at less than full employment even in the long run
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short run aggregate supply curve
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the upward sloping aggregate supply curve which assumes that money wage rates are fixed
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supply side shocks
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factors such as change in wage rates or commodity prices which cause the short run aggregate supply curve to shift
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budget
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a statement of the spending and income plans of an individual, firm or government
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budget deficit
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a deficit which arises because the govt spending is greater than its receipts causing the them to borrow money
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budget surplus
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a govt surplus arising from govt spending being less than its receipts allowing them to use the difference to repay part of the National Debt
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demand side policies or demand management
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govt use of fiscal and other policies to manipulate the level of aggregate demand in the economy
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expansionary fiscal policy
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fiscal policy used to increase aggregate demand in the economy
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fiscal policy
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decisions about spending, taxes and borrowing of the govt
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National Debt
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the accumulated borrowings of govt
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overheating
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the economy overheats if aggregate demand is increased when the economy is already at its full productive potential leading to increased inflation with little of no increase in output
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Public Sector Net Cash Requirement
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the official name given to the difference between govt spending and its receipts in the uk
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bottleneck
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a supply side constraint in a particular market in an economy which prevents higher growth for the whole economy
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laffer curve
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a curve which shows that at low levels of taxation tax revenues will increased is tax rates are increased. However if tax rates are high then a further rise in rates will reduce total tax revenues because of the disincentive effects of the increase in tax
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poverty or earnings trap
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occurs when an individual is little better off or even worse off when gaining an increase in wages because of the combined effect of increased tax and benefit withdrawal
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supply side economics
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the study of how changes in aggregate supply will affect variables such as national income
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supply side policies
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govt policies designed to increase the productive potential of the economy and push the long run aggregate supply curve to the right
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unemployment trap
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occurs when an individual is little better off or worse off when getting a job after being unemployed because of the combined effect of increased tax and benefit withdrawal
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bank base rate
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the interest rate which a bank sets to determine its borrowing and lending rates offered below base rate to customers who deposit funds with it and interest rates above base rate to borrowers
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central bank
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the financial institution in a country or group of countries typically responsible for the printing and issuing of notes and coins, setting short term interest rates, managing the country’s gold and currency reserves and issuing govt debt
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instrument of policy
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an economic variable such as the rate of interest, income tax rates or govt spending on education which is used to achieve a target of govt policy
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monetary policy
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the attempt by govt or central bank to manipulate the money supply, the supply of credit, interest rates or any other monetary variables to achieve the fulfillment of policy goals such as price stability
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rate of interest
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the price of money determined by the demand and supply of funds in a money market where there are borrowers and lenders
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target of policy
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an economic goal which the govt wishes to achieve such as low unemployment or high growth
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appreciation or depreciation of a currency
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a rise or fall in the value of a currency when the currency is floating and market forces determine its value
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export and import volumes
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the number of exports and imports
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hot money
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short term speculative flows of money across foreign exchanges made in order to make a profit on the difference between buying and selling price of the currency

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