AP macro unit 4

Economic Growth

Comes from increases in human capital and physical capital.

Savings

Is equal to investment spending.

Investment Spending

National Savings plus Capital Inflow.

Types of Financial Assets

Includes loans, bonds, loan-backed securities, stocks, and bank deposits.

Loans

A type of financial asset.

Bonds

Involves interest rates that are inversely related.

Loan-backed Securities

A financial asset that provides payments backed by loans.

Stocks

Equity ownership in a company.

Bank Deposits

Funds held in financial institutions.

Types of Financial Intermediaries

Includes mutual funds, life insurance companies, pension funds, and banks.

Banks

Financial institutions meant to reduce transaction costs, reduce risk, and provide liquidity.

Liquidity

The ability to convert an asset into cash without much loss of value.

Illiquidity

When an asset loses significant value when converted to cash.

Diversification

Investing in several different assets to reduce total risk.

Inflation Rate Formula

[ (PL in Year 2 - PL in Year 1) / PL in Year 1 ] * 100.

Nominal Interest Rate

The stated interest rate that is unadjusted for inflation.

Real Interest Rate

Calculated as nominal interest rate minus the actual inflation rate.

Higher Inflation Than Expected

Results in borrowers winning and lenders losing.

Lower Inflation Than Expected

Results in lenders winning and borrowers losing.

Interest Rate

Additional charge by lenders to borrowers for money lent.

National Savings

The sum of private savings and budget balance.

Capital Inflow

Net inflow of funds into a country.

Commodity Money

A medium of exchange with intrinsic value.

Fiat Money

A medium of exchange that derives its value from government decree.

M1 Money Aggregate

Currency in circulation plus traveler’s checks and checkable bank deposits.

M2 Money Aggregate

M1 plus near-moneys like savings accounts and time deposits.

Present Value

The worth of a dollar today compared to its worth in the future under inflation.

Net Present Value

Calculated as the present value of current and future benefits minus costs.

Bank Runs

Occurs when a large number of depositors withdraw funds simultaneously.

Deposit Insurance

Guarantees security of the first $250,000 of every bank account.

Reserve Requirements

Regulations requiring banks to maintain certain reserve ratios.

Money Multiplier

Calculated as 1 divided by the reserve ratio.

Liquidity Preference Model

A model that illustrates the money market.

Market for Loanable Funds

Involves suppliers being savers and demanders being borrowers.

Fisher Effect

Relates expected future inflation to changes in interest rates.

Expansionary Monetary Policy

Includes decreasing reserve ratios and lowering discount rates.

Contractionary Monetary Policy

Includes increasing reserve ratios and increasing discount rates.

Federal Reserve Functions

Includes providing financial services, supervising banks, maintaining stability, and conducting monetary policy.

PPC - Production Possibilities Curve

Illustrates the maximum feasible output combinations of two goods.