AP Macro Unit 4

Household Wealth

the value of a household's accumulated savings

Financial Asset

a nonphysical asset that entitles the buyer to future income from the seller

Financial Risk

uncertainty about future outcomes that involve financial losses and gains

Liquid

an asset that can be quickly converted to cash without much loss of value

Illiquid

an asset that cannot be quickly converted into cash without much loss of value

Loan

a lending agreement between an individual lender and an individual borrower

Bond

an interest-bearing asset that represents a loan to a company or government

Stock

a type of equity that represents ownership of a company

Nominal Interest Rate

the interest rate actually paid for a loan

Real Interest Rate

the nominal interest rate adjusted for inflation

Money

any asset that can easily be used to purchase goods and services

Medium of Exchange

the primary function of money, this is when money is used in a transaction to exchange for goods and services

Store of Value

another function of money, this is when money is held in savings for future use because of the belief it will hold purchasing power over time

Unit of Account

the last function of money, this is when money is used as a measure to set prices and make economic calculations

Commodity Money

a good used as a medium of exchange that has intrinsic value in other uses

Fiat Money

a medium of exchange whose value derives entirely from its official status as a means of payment

Monetary Base

Also known as M0, this is the total amount of currency (cash) in circulation or kept on reserve by commercial banks

M1

monetary aggregate that includes currency in circulation, checkable bank deposits, and other liquid deposits

M2

monetary aggregate that includes M1 plus less liquid 'near monies' (financial assets that can be readily converted into cash)

Fractional Reserve Banking

a banking system in which banks do not keep all of their deposits on reserve, but rather loan out some of their deposits

Bank Reserves

the currency that banks hold in their vaults plus their deposits at the central bank

Required Reserve Ratio

also known as the reserve requirement, this is the percentage of deposits that a commercial bank must hold in reserves

Required Reserves

the reserves that a bank must hold, as mandated by the central bank

Excess Reserves

additional reserves a bank chooses to hold. These represent the funds available to banks to loan out to borrowers

Money Multiplier

the ratio of the money supply to the monetary base

Money Demand Curve

shows the relationship between the quantity of money demanded and the nominal interest rate

Money Supply Curve

shows the relationship between the quantity of money supplied and the nominal interest rate - this curve is independent of the nominal interest rate

Monetary Policy

actions of a central bank used to stabilize the economy by influencing aggregate demand through changing interest rates

Expansionary Monetary Policy

monetary policy designed to increase aggregate demand

Contractionary Monetary Policy

monetary policy designed to decrease aggregate demand

Overnight Interbank Lending Rate

sometimes known as the policy rate, this is the interest rate that banks charge other banks for overnight loans

Limited Reserve System

a system where reserves are scarce and therefore relatively small changes in the supply of reserves shifts the money supply and changes the interest rate

Ample Reserve System

a system where banks hold high levels of excess reserves and therefore changes in the supply of reserves does not change the interest rate significantly

Discount Rate

the interest rate the central bank charges on loans to banks

Open Market Operations (OMOs)

the purchase or sale of government debt (bonds) by a central bank

Interest on Reserves

the amount the central bank pays in interest to banks for their balances held in reserve

Budget Surplus

when tax revenue exceeds government spending

Budget Deficit

when government spending exceeds tax revenue

National Savings

the sum of private savings and the budget balance, is the total amount of savings generated within the economy

Net Capital Inflow

equal to the total inflow of foreign funds minus the total outflow of domestic funds to other countries

Loanable Funds Market

a hypothetical market that brings together those who want to lend money and those who want to borrow money

Investment Tax Credit

an amount that firms are allowed by law to deduct from their taxes based on their investment spending