AP Macroeconomics Unit 4 Vocabulary

Actual Reserves

AKA (total reserves or reserves) Made up of excess reserves and required reserves

Asset Demand

Saving Money; The demand for assets

Assets

A firm's productive resources

Balance Sheet

Also called the statement of financial condition, it is a summary of a company's assets, liabilities, and owners' equity

Bank Deposit

A claim on a bank that obliges the bank to give the depositor their cash when demanded

Bank Reserves

The currency that banks hold in their vaults plus their deposits at the Federal Reserve

Bank Run

A phenomenon in which many of a bank's depositors try to withdraw their funds due to fears of a bank failure

Bonds

A loan in the form of an iou that pays interest

Capital Inflow

The total inflow of foreign funds minus the total outflow of domestic funds to other countries

Central Bank

An institution that oversees and regulates the banking system and controls the monetary base

Checkable Bank Deposits/ Demand Deposits

Bank accounts on which people can write checks.

Crowding Out

Occurs when a government deficit dries up the interest rate and leads to reduced investment spending

Currency

Money (synonym)

Deposit Insurance (FDIC)

Federal Depositors Insurance Corporation; Insurance for banks; Every person is guaranteed $250,000 is the bank where their money is goes under

Discount Rate

The interest rate the Fed charges banks for overnight loans

Excess Reserves

A bank's reserves over and above its required reserves

Federal Funds Market

Allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves

Federal Funds Rate

The interest rate that Banks charge each other for overnight loans

Fiat Money

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

Financial Asset

A paper claim that entitles the buyer to future income from the seller

Financial Intermediary

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

Financial Services Industry

economic services provided by the finance industry

Fisher Effect

The general principle that an increase in expected future inflation drives up the nominal interest rate by the same number of percentage points, leaving the expected real interest rate unchanged

Fractional Reserve System

Banks must keep a fraction of every deposit

Future Value

The amount to which some current amount of money will grow as interest accumulate over a specified period of time

Interest Rate

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

Intrinsic Value

The value of an option if it were to expire immediately with the underlying stock at its current price; the amount by which an option is in-the-money

Leakage

-People not depositing their money (no money to loan)

-Banks holding additional Required Reserves (not loaning all the money they can)

Legal Tender

Currency, such as coin and paper money, declared by law to be valid and sufficient for the payment of debts

Liability

A requirement to pay money in the future

Liquid

Describes an asset if it can be quickly converted into cash without much loss of value

Loanable Funds Market

A hypothetical market that brings together those who want to lend money and those who want to borrow money

Loan-backed securities

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

Medium of Exchange

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

Monetary Aggregate

An overall measure of the money supply

Monetary Base

The sum of currency in circulation and bank reserves

Monetary Policy

the central bank's use of changes in the quantity of money or the interest rate to stabilize the economy

Money

An asset that can easily be used to purchase goods and services

Money Demand Curve

Shows the relationship between the quantity of money and the interest rate

Money Market

The trade in short-term, low-risk debt securities

Money Multiplier

The ratio of the money supply to the monetary base; indicates the total number of dollars created in the banking system by adding $1 addition to the monetary base

Money Supply

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

National Savings

The sum of private savings and the budget balance; the total amount of savings generated within the economy

Near-Monies

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

Open-Market Operation

a purchase of sale of government debt by the Fed

Physical Asset

A claim on a tangible object that gives the owner the right to dispose of the object as they wish

Prime Interest Rate

The lowest rate of interest on bank loans at a given time and place, offered to preferred borrowers

Rate of Return

(on a project) is the profit earned on a the project as expressed as a percentage of its cost

Reserve Ratio

the fraction of bank deposits that a bank (must) holds as reserves

Reserve Requirement

rule set by the Federal Reserve that determine the required reserve ratio for banks

Savings

An account at a bank where a customer deposits money for non-immediate use

Securities

Certificates evidencing ownership of equity (stocks) or debt obligations (bonds)

Store of Value

a means of holding purchasing power over time

Target Dilemma

Target Dilemma

T-Account

A tool for analyzing a business' financial position by showing, in a single table, the business's assets (on the left) and liabilities (on the right)

Transaction Costs

The expenses of negotiating and executing a deal

Transaction Demand

The amount of money needed to cover the needs of an individual, firm, or nation

Unit of Account/ Measure of Value

A measure used to set prices and make economic calculations

Velocity of Money

The ratio of nominal GDP to the money supply; a measure of the number of times the average dollar bill is spent per year

Contractionary Monetary Policy

Monetary Policy that reduces aggregate demand

Cyclically Adjusted Budget Ballance

An estimate of what the budget balance would be is real GDP were exactly equal to potential GDP

Debt- GDP Ratio

The government's debt as a percentage of GDP

Expansionary Monetary Policy

Monetary policy that increases aggregate demand

Fiscal Year

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

Government Debt

The accumulation of past budget deficits, minus past budget surpluses

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

Inflation Targeting

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

Public Debt

Government Debt held by individuals and institutions outside the government

Target Federal Funds Rate

The Federal Reserve's desired level for the federal funds rate; the Federal Reserve can move the interest rate and achieve this target through open-market operations that shift the money supply curve

Taylor Rule for Monetary Policy

A rule for setting the federal funds rate that takes into account both the inflation rate and the output gap