AP Economics Unit 4: Money and Financial Sector

medium of exchange

an item that buyers give to sellers when they want to purchase goods and services

store of value

a means of holding purchasing power over time

unit of account

a means for comparing the values of goods and services

All liquid money (cash, coins, currency, checking acct.)

M1

M2

All of M1 + less immediate (liquid) forms of money to include savings, money market mutual funds, and small denomination time deposits.

demand deposit

the money in checking accounts

Liquidity

the ease with which an asset can be converted into cash

Money Demand

A relationship between the interest rate and the quantity of money that people are willing to hold at any given interest rate.

stock

A share of ownership in a corporation.

bond

a formal contract to repay borrowed money with interest at fixed intervals

time deposit

an account with guaranteed interest for a period of time

bank balance sheet

T account showing assets and liabilities

assets

money and other valuables belonging to an individual or business

Liabilities

debts that you owe

fractional reserve banking

a banking system that keeps only a fraction of funds on hand and lends out the remainder

required reserves

reserves that a bank is legally required to hold, based on its checking account deposits

excess reserves

a bank's reserves over and above its required reserves

federal funds rate

the interest rate at which banks make overnight loans to one another

prime interest rate

the lowest rate charged by a bank for a short-term loan

discount rate

The interest rate on the loans that the Fed makes to banks

open market operations

the purchase and sale of U.S. government bonds by the Fed

1/reserve ratio

money multiplier

nominal interest rate

the interest rate actually paid for a loan

real interest rate

the interest rate corrected for the effects of inflation

FDIC

a federally sponsored corporation that insures accounts in national banks and other qualified institutions

velocity of money

the rate at which money changes hands

Present Value of Money

the amount of money you would need to deposit today in order to accumulate a specific amount in the future

Future value of money

How much your money will be worth in the future if you invest it.