AP Macro Unit 5

Interest rate

Is the price, calculated as a percentage of the amount borrowed, charged by lenders to borrowers for the use of their savings for one year.

Savings-investment spending identity

Savings and investment spending are always equal for the economy as a whole.

Budget surplus

Is the difference between tax revenue and government spending when tax revenue exceeds government spending.

Budget deficit

Is the difference between tax revenue and government spending when government spending exceeds tax revenue.

Budget balance

Is the difference between tax revenue and government spending.

National savings

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

Capital inflow

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

Household wealth

Is the value of its accumulated savings.

Financial asset

Is a paper claim that entitles the buyer to future income from the seller.

Physical asset

Is a claim on a tangible object that gives the owner the right to dispose of the object as he or she wishes.

Liability

Is a requirement to pay money in the future.

Transaction costs

The expenses of negotiating and executing a deal.

Financial risk

Is uncertainty about future outcomes that involve financial losses and gains.

Diversification

Investing in several different assets with unrelated risks.

Liquid

Can be quickly converted into cash without much loss of value.

Illiquid

Cannot be quickly converted into cash without much loss of value.

Loan

A lending agreement between an individual lender and an individual borrower.

Default

Occurs when a borrower fails to make payments as specified by the loan or bond contract.

Loan-backed security

An asset created by pooling individual loans and selling shares in that pool.

Financial intermediary

An institution that transforms the funds it gathers from many individuals into financial assets.

Mutual fund

A financial intermediary that creates a stock portfolio and then resells shares of this portfolio to individual investors.

Pension fund

A nonprofit institution that invests the savings of members and provides them with income when they retire.

Life insurance company

Sells policies that guarantee a payment to a policyholder’s beneficiaries when the policyholder dies.

Bank deposit

A claim on a bank that obliges the bank to give the depositor his or her cash when demanded.

Bank

A financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance borrowers’ investment spending on illiquid assets.

Money

Any asset that can easily be used to purchase goods and services.

Currency in circulation

Cash held by the public.

Checkable bank deposits

Bank accounts on which people can write checks.

Money supply

The total value of financial assets in the economy that are considered money.

Medium of exchange

An asset that individuals acquire for the purpose of trading for goods and services rather than for their own consumption.

Store of value

A means of holding purchasing power over time.

Unit of account

A measure used to set prices and make economic calculations.

Commodity money

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

Commodity-backed money

Medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods.

Fiat money

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

Monetary aggregate

An overall measure of the money supply.

Near-moneys

Financial assets that can’t be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits.

limited reserves monetary policy

dr, rr, omo

M1

cash, checking account, traveller’s checks

M2

M1 + savings accounts, CDs

Currency in circulation + reserves

Monetary base

Social insurance

programs are government programs intended to protect families against economic hardship.

Expansionary fiscal policy

Fiscal policy that increases aggregate demand.

Contractionary fiscal policy

Fiscal policy that decreases aggregate demand.

Fiscal policy tools

Change in government spending, change in taxes, Change in government transfers

Government transfers

payments by the government to households for which no good or service is provided in return.

Government transfers

Social security, medicare, medicaid

Discretionary fiscal policy

fiscal policy that is the result of deliberate actions by policy makers rather than rules.

Automatic stabilizers

government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands.

Lump-sum taxes

taxes that don’t depend on the taxpayer’s income.

balanced budget multiplier

the factor by which a change in both spending and taxes changes real GDP.

tax multiplier

the factor by which a change in tax collections changes real GDP.

Cyclically adjusted budget balance

an estimate of what the budget balance would be if real GDP were exactly equal to potential output.

Government debt

the accumulation of past budget deficits, minus past budget surpluses.

Fiscal year

October 1 to September 30 and is labeled according to the calendar year in which it ends.

Public debt

government debt held by individuals and institutions outside the government.

debt-GDP ratio

the government’s debt as a percentage of GDP.

Implicit liabilities

spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics.

Target federal funds rate

a desired level for the federal funds rate.

Expansionary monetary policy

Monetary policy that increases aggregate demand

Contractionary monetary policy

Monetary policy that decreases aggregate demand

Taylor rule for monetary policy

Federal funds rate = 1 + (1.5 × inflation rate) + (0.5 × output gap)

Inflation targeting

when the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target.

Crowding out

the adverse effect of increased government borrowing in the loanable funds market, which increases real interest rates and crowds out private investment