central bank independence  a description of the legal authority of central banks to make decisions on monetary policy with little interference by the government in power.
discount rate  the interest rate that the Fed charges commercial banks when they borrow from the Fed.
exchange market intervention  purchases and sales of foreign currency by a government in exchange markets with the intention to affect the exchange rate.
fixed exchange rate policy  a policy in which a country maintains a fixed value of its currency in terms of other currencies.
flexible exchange rate policy  a policy in which exchange rates are determined in foreign exchange markets and governments do not agree to fix them.
money demand  a relationship between the interest rate and the quantity of money that people are willing to hold at any given interest rate.
political business cycle  a business cycle caused by politicians’ use of economic policy to overstimulate the economy just before an election.
time inconsistency  the situation in which policymakers have the incentive to announce one economic policy but then change that policy after citizens have acted on the initial, stated policy.