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Economic Terms

0-9   A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Cash Ratio Deposit

Is a non-interest earning deposit from financial institutions placed into the central bank of the country of origin, to provide finance for the central bank and cash reserves for future liquidity problems. Currently in the UK financial institutions have to hold 0.5% of their asset values in the Bank of England.


Central bank

The institution responsible for maintaining a stable banking system by managing the currency, money supply and interest rates and to supervise commercial banks and provide finance in times of crisis (lender of last resort).

Below is a summary of the main policy initiatives that the Bank of England is responsible for, to enable the UK economy to function properly.


Ceteris paribus

Assuming that all other things remain the same. This is an important assumption in economics as it allows analysis to consider the impact of individual variables.

Choice Architecture

Is the design of different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision-making. There are three different varities of this: default choice, restricted choice and mandated choice. These are all more specific forms of framing.


Circular flow of Income

An economic model that explains how production and exchange of goods and services stimulate money flows within an economy.

Below is a diagram to illustrate how the money flows move within the economy, as well as external leakages and injections.


Claimant count

The number of people claiming Job Seekers Allowance (unemployment benefit). It does not necessarily represent the total number of unemployed people as many are excluded from claiming the benefit even though they do not have a job.

Below is a diagram to show the positional change in the claimant count in the UK from 1971-2014.


Classical economists

Believe in a laissez faire approach and that markets perform efficiently if individuals are left to their own devices and make decisions based on their own self interest with minimal government intervention.

In macroeconomics they distinguish short (upward sloping +) and long run (vertical) supply curve.


Closed economy

An economy that does not trade with other countries. Although there are very few practical or significant examples of this, making the assumption that an economy is closed is often made to explain and analyse various macroeconomic issues.

Cobweb Model

A period of market instability that is initiated by a supply side shock but converges back to equilibrium over several cycles because demand is more elastic than supply.

Below is a diagram to show how a disequilibrium converges to an equilibrium over time in a specific agricultural market.  A poor harvest in period 1 means supply falls to Q1 so that prices rise to P1. If producers plan their period 2 production under the expectation that this high price will continue, then the period 2 supply will be higher, at Q2. Therefore, prices fall to P2 when they try to sell all their output. As this process repeats itself i.e. between periods of low supply with high prices and then high supply with low prices, the price and quantity trace out a spiral. In the figure below, the economy converges to the equilibrium where supply and demand intersect. However this process can also work in the reverse in a diverging case - but that only happens when the supply curve is more elastic than the demand curve.


Cognitive Biases

A systematic limitation in a human's ability to think rationally about a situation. It is these cognitive biases which lead to irrational behaviour which ultimately is the driving force behind behavioural economics. For instance, one cognitive bias is the representative bias which causes individuals to fall for the gambler's fallacy and ultimately make incorrect decisions based on false beliefs.

 


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