Monetary Policy

Aggregate demand
In Canada, aggregate demand is the demand for Canadian-produced goods and services from all sources, including households, firms, governments, and foreigners' demand for Canadian products. Aggregate demand is the sum of planned consumption, investment, government purchases, and net exports.

Aggregate output
The sum of the value of all goods and services produced in the economy during a particular period of time, usually a year. The most common measure of aggregate output is gross domestic product (GDP).

Causality
There is said to be causality in a relationship between two variables when a change in one variable causes the change in the other variable.

Correlation
Two variables are correlated when movements in the two variables tend to occur together. With a positive correlation, one variable tends to be above its average value when the other one is above its average value—that is, the two variables tend to move in the same direction. With a negative correlation, one variable tends to be above its average value when the other one is below its average value—that is, the two variables tend to move in opposite directions.

Expectations of inflation
The expected or anticipated value of the rate of inflation, for some specified future period. The Conference Board of Canada regularly publishes survey data showing private-sector expectations of future inflation.

Fiscal policy
The set of decisions a government makes with respect to taxation, spending, and borrowing.

Inflation
The rate of change of some general index of prices. In many countries it is common to use an index based on a collection of prices of consumer goods—such as the consumer price index (CPI). The measure of CPI inflation is then the rate of change in the CPI.

Macroeconomics
The study of the behaviour of aggregate economic variables, such as total output (gross domestic product, GDP), total employment, the unemployment rate, inflation, and overall economic growth. Macroeconomics glosses over much of the rich detail within the markets for individual goods and services and instead focuses on the behaviour of the aggregate economy.

Monetary policy
The set of decisions a government makes, usually through its central bank, regarding the amount of money in circulation in the economy. In Canada, the Bank of Canada adjusts the target for the overnight interest rate to achieve a rate of monetary expansion consistent with keeping inflation low and relatively stable (and close to 2 per cent).

Net exports
The value of exports (products sold to other countries) minus imports (products purchased from other countries). If net exports are positive, there is a trade surplus; if net exports are negative, there is a trade deficit.

Output gap
The difference between the actual level of aggregate output (GDP) and the economy's level of potential output. A positive output gap means that actual output exceeds potential output; this is a situation of excess demand. A negative output gap means that actual output is below potential output; this is a situation of excess supply.

Policy instrument
The specific method by which a policy is implemented. Fiscal policy instruments include various tax rates and spending levels (on specific products). In Canada, the single monetary policy instrument is the target for the overnight interest rate.

Potential output
The economy's level of production capacity. This is the level of aggregate output the economy can produce on a sustained basis, without causing inflation to either rise or fall.

Relative prices
The price of one product expressed in terms of the price of some other product (or group of products). When we say that changes in market prices reflect changes in scarcity, we are referring to changes in relative prices.

Resource allocation
The overall pattern of consumption and production of goods and services—which firms produce which goods, and with which inputs; how much of each good is produced; and how do consumers divide their scarce resources among the many products.

Standard deviation
A measure of the volatility of a variable. If the variable tends to make large deviations from its average value, the standard deviation will be large; if it is more typical that movements are only small deviations from the variable's average value, the standard deviation will be small.

Transmission mechanism
The complex chain of cause and effect that connects the central bank's policy instrument (typically the setting of a short-term interest rate) with asset prices, aggregate demand, total output, the output gap, and, eventually, inflation.