Financial Sector and Monetary Policy

Flashcards covering key vocabulary related to the financial sector and monetary policy, focusing on definitions and key concepts.

Liquidity

The ease in which an asset can be converted into a medium of exchange.

Bonds (aka securities)

Interest-bearing assets often issued by businesses or the government.

Demand deposits

Funds deposited in a bank account that can be withdrawn without any penalty.

Interest rate

The amount charged by a lender to a borrower for the use of money.

Real interest rate

Nominal interest rate minus expected inflation.

M1 money supply

Includes cash, currency, checkable deposits, and savings deposits.

M2 money supply

Includes M1 and 'near monies' like time deposits (certificates of deposits).

Fractional reserve banking

The idea that banks hold a fraction of customers' deposits and lend the remaining funds out.

Required reserves

Deposits that banks must legally hold and cannot loan out.

Excess reserves

The funds that the bank can loan out beyond required reserves.

Money multiplier

Calculated as 1 divided by the reserve requirement.

Aggregate Demand

The total demand for goods and services within an economy.

Interest on Reserves (IOR)

The interest rate that the Federal Reserve pays commercial banks to hold reserves.

Loanable Funds Market

A market that brings together borrowers and lenders, also known as savers.

Crowding out

When increased government borrowing leads to a decrease in private investment.

Nominal interest rate

The stated interest rate without adjustment for inflation.