4.1-4.4 quiz ap macro

financial assets

written claim where buyers have the right to future income from sellers

assets

any item of economic value that can be converted into cash

whats the oppurtunity cost of holding money

the interest u could be earning

liquidity: how easily assets can be converted into cash.

most to least liquid?

cash, bonds, ocmpany stocks, real estate

bonds are commonly issued by _____, and at the end of a bonds term, the holder gets what?

government,

the holder gets the face value of the bond plus interest earned over the term

bond prices and interest rates are _____ related

inversely: when one goes up the other goes down.

nominal interest rate

is not adjusted for inflation

is the advertised/public price

nominal interest rate equation

real interest + expected inflation

real interest rate

is adjusted for inflation

real rate of return after inflation takes place

real interest rate equation

nominal interest - expected inflation

real rate of return

the annual percentage of profit earned on an investment, adjusted for inflation

for someone who has invested in a finicial asset:

if actual inflation > it falls

if expected inflation > it rises

as an example, in terms of a bank, where would the categories expected real interest rate and nominal interest rate fall?

what happens to borrowers and lenders during unexpected inflation?

expected real interest rate: amount bank hopes to earn

nominal interest rate: rate they set

borrowers are helped and lenders are hurt by unexpected inflation

commodity money

something used for money, that has an altaernative use or value

fiat money

something used for money, but has no altaernative use or value

role of money

1. meduim of exchange

2. unit of account

3. store of value

1. used to buy goods or services

2. used to set prices or values

3. retains value over time

monetary base (M0)

the total amount of curency that is either in circulation or held in bank reserves

amount is determined by the fed

M1

currency in circulaiton, demand deposits, savings account

-most liquid forms of money

-can be used to purchase things

M2

includes M1, small time deposits, and money market shares

less liquid than M1

“near money”

fraction reserve system

a banking system in which banks hold only a fraction of deposits as required reserves can lend the rest out

reserve ratio

the fraction of bank deposits that a bank holds as reserves

excess reserves

banks reserves over and above what is required

T account (bank balance sheet)

a tool for analyzing a businesses financial position by showing a buisiness assets (left) and liabilities (right)

both sides must always be equal

liability

a legal or financial obligation that must be paid back

money multiplier

measuraces maximum amount

1/ RR

maximum extension of money supply

money multiplier x excess reserves

MM x ER

impact of withdrawal

reduces the money supply