Unit 4 Vocabulary

Household Wealth

The value of a household’s accumulated savings.

Financial Asset

A nonphysical asset that entitles the buyer to future income from the seller.

Financial Risk

Uncertainty about future outcomes that involve financial losses and gains.

Liquid

An asset that can be quickly converted to cash without much loss of value.

Illiquid

An asset that cannot be quickly converted into cash without much loss of value.

Loan

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

Bond

An interest-bearing asset that represents a loan to a company or government.

Stock

A type of equity that represents ownership of a company.

Nominal Interest Rate

The interest rate actually paid for a loan.

Real Interest Rate

The nominal interest rate adjusted for inflation.

Money

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

Medium of Exchange

The primary function of money, used in transactions to exchange for goods and services.

Store of Value

A function of money where it is held in savings for future use, maintaining purchasing power.

Unit of Account

The function of money used as a measure to set prices and make economic calculations.

Commodity Money

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

Fiat Money

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

Monetary Base (M0)

The total amount of currency in circulation or kept on reserve by commercial banks.

M1

Monetary aggregate that includes currency in circulation, checkable bank deposits, and other liquid deposits.

M2

Monetary aggregate that includes M1 plus less liquid 'near monies'.

Fractional Reserve Banking

A banking system where banks do not keep all of their deposits on reserve but loan out some.

Bank Reserves

The currency that banks hold in vaults plus their deposits at the central bank.

Required Reserve Ratio

The percentage of deposits that a commercial bank must hold in reserves.

Required Reserves

The reserves that a bank must hold, as mandated by the central bank.

Excess Reserves

Additional reserves a bank chooses to hold, available to loan out.

Money Multiplier

The ratio of the money supply to the monetary base.

Money Demand Curve

Shows the relationship between the quantity of money demanded and the nominal interest rate.

Money Supply Curve

Shows the relationship between the quantity of money supplied and the nominal interest rate.

Monetary Policy

Actions of a central bank used to stabilize the economy by influencing aggregate demand.

Expansionary Monetary Policy

Monetary policy designed to increase aggregate demand.

Contractionary Monetary Policy

Monetary policy designed to decrease aggregate demand.

Overnight Interbank Lending Rate

The interest rate that banks charge other banks for overnight loans.

Limited Reserve System

A system where reserves are scarce, with small changes in the supply shifting the money supply.

Ample Reserve System

A system where banks hold high levels of excess reserves, minimally affecting interest rates.

Discount Rate

The interest rate the central bank charges on loans to banks.

Open Market Operations (OMOs)

The purchase or sale of government debt by a central bank.

Interest on Reserves

The amount the central bank pays in interest to banks for their reserves.

Budget Surplus

When tax revenue exceeds government spending.

Budget Deficit

When government spending exceeds tax revenue.

National Savings

The sum of private savings and the budget balance, total savings within the economy.

Net Capital Inflow

Total inflow of foreign funds minus total outflow of domestic funds to other countries.

Loanable Funds Market

A hypothetical market that connects those who want to lend money with those who want to borrow.

Investment Tax Credit

An amount that firms can deduct from taxes based on investment spending.