AP Micro/Macro Economics Flashcards

Vocabulary flashcards based on Unit 9: Monetary Policy.

Monetary Policy

Policy decisions about interest rates, money supply, and exchange rates.

Expansionary Monetary Policy

A policy that involves decreasing interest rates to stimulate aggregate demand and increase inflation.

Federal Funds Rate

The interest rate banks charge each other for overnight loans.

Discount Rate

The interest rate the Federal Reserve charges for short-term loans to banks.

FED (Central Bank)

The institution responsible for managing a country's monetary policy, including setting interest rates and controlling the money supply.

Store of Value

Money can be saved and retrieved in the future.

Unit of Account

Money provides a standard measure of value.

Medium of Exchange

Money is used to facilitate transactions.

Near Money

Assets that can be quickly converted to cash.

Total Reserves

Currency held by banks plus deposits at the Federal Reserve.

Reserve Ratio

The fraction of deposits that banks are required to hold in reserve.

Reserve Requirement

The minimum amount of funds a bank must hold in reserve (vault), set by the Federal Reserve.

Money Supply

The entire quantity of a country's commercial bills, loans, credit, and other liquid instruments in the economy.

Liquidity

Refers to the ease and speed with which an asset can be converted into cash without significant loss of value.

Open Market Operations

The FED buying and selling bonds or the purchase of government debt by the FED.

Money Demand Curve

The relationship between the interest rate and quantity of money demanded by the public illustrated in a graph.

Crowding Out effect

When increased government borrowing drives up the interest rate and leads to decreased consumer borrowing.

Loan

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

Bond

A IOU or promise by the borrower to repay a loan, usually to include a sum of interest each year.

Stock or share

A share of ownership in a company.

Fractional Reserve System

System requiring financial institutions to set aside a fraction of their deposits in the form of vault cash.

Quantitative Easing

Technique used by the FED to keep interest rates low and encourage banks to loan money.

Government Surplus

When the government spending is less than tax revenues.

Government Deficit

When the government spending is more than tax revenue.

Government Debt

Overall government debt, sum of year after year.