AP macroeconomics unit 4

Interest Rate

The price paid for borrowing money

Wealth

The total value of all assets owned minus liabilities.

Financial Asset

A paper or electronic claim that represents ownership or debt (stocks

Physical Asset

A tangible item that has value (land

Liability

A financial obligation or debt that must be repaid.

Financial Risk

The chance of losing money due to uncertainty in financial markets.

Liquid

An asset that can be quickly converted to cash with little loss of value.

Illiquid

An asset that cannot easily be converted to cash without losing value.

Loan

Money borrowed that must be repaid with interest.

Bond

A financial asset representing a loan to a firm or government with fixed interest payments.

Stock

A financial asset representing partial ownership of a firm.

Bank Deposit

Money placed in a bank account that can be withdrawn or used for payments.

Bank

A financial institution that accepts deposits and makes loans.

Nominal Interest Rate

The stated interest rate not adjusted for inflation.

Real Interest Rate

The nominal interest rate minus inflation.

Money

Any asset that serves as a medium of exchange

Money Supply

The total amount of money available in the economy.

Medium of Exchange

An item used to buy goods and services.

Store of Value

An asset that retains value over time.

Unit of Account

A standard numerical measure of value.

Commodity Money

Money that has intrinsic value (gold

Commodity Backed Money

Money backed by a physical commodity.

Fiat Money

Money with no intrinsic value that is accepted by government decree.

Monetary Aggregate

A measure of the money supply (M1

Monetary Base

Currency in circulation plus bank reserves held at the central bank.

M1

Currency

M2

M1 plus savings accounts

Central Bank

The institution that controls a country’s money supply and monetary policy.

Open Market Operations

The buying and selling of government bonds by the central bank.

Fractional Reserve Banking

A system where banks keep only a fraction of deposits as reserves.

Bank Reserves

Cash or deposits that banks hold and do not lend out.

Reserve Requirement

The fraction of deposits banks are legally required to hold as reserves.

Required Reserves

The minimum reserves a bank must hold by law.

Excess Reserves

Reserves held beyond the required amount.

Money Multiplier

The ratio of the change in money supply to the change in reserves.

Money Demand Curve

Shows the relationship between interest rates and quantity of money demanded.

Money Supply Curve

A vertical curve representing money supply set by the central bank.

Inflation Targeting

A monetary policy strategy aimed at keeping inflation near a specific rate.

Expansionary Monetary Policy

Policy actions that increase the money supply to stimulate the economy.

Contractionary Monetary Policy

Policy actions that decrease the money supply to reduce inflation.

Overnight Interbank Lending Rate

The interest rate banks charge each other for overnight loans.

Federal Funds Rate

The U.S. overnight interbank lending rate targeted by the Federal Reserve.

Policy Rate

The interest rate targeted by the central bank to guide monetary policy.

Limited Reserves

A system where banks hold minimal excess reserves.

Ample Reserves

A system where banks hold large excess reserves.

Discount Rate

The interest rate the central bank charges banks for loans.

Interest on Reserves

The interest paid by the central bank on bank reserves.

Quantitative Easing

A policy where the central bank buys long-term assets to increase money supply.

Zero-Bound

When interest rates are near zero and cannot be lowered further.

Monetary Policy Lags

Delays between policy actions and their economic effects.

Budget Surplus

When government revenue exceeds spending.

Budget Deficit

When government spending exceeds revenue.

National Savings

Total saving by households

Net Capital Inflow

Foreign money entering a country minus money leaving.

Loanable Funds Market

The market where saving supplies funds and borrowing demands funds.

Investment Tax Credit

A tax reduction designed to encourage business investment.

Crowding Out

When government borrowing reduces private investment.