macro quiz 6

debtors

economic agents who borrow funds

credit

the loans that the debtor receives

interest rate / nominal interest rate

the annual cost of a $1 loan

real interest rate

the nominal interest rate minus the inflation rate

credit demand curve

the relationship between the quantity of credit demanded and the real interest rate

credit supply curve

the relationship between the quantity of credit supplied and the real interest rate

credit market

where borrowers obtain funds from savers

Financial intermediaries

channel funds from suppliers of financial capital to users of financial capital

securities

financial contracts to stocks and/or bonds

bank reserves

consist of vault cash and reserves held at the Federal Reserve Bank

demand deposits

funds that depositors can access on demand

stockholders equity

the difference between a bank’s total assets and its total liabilities

maturity

the time until debt must be repaid

maturity transformation

the process by which banks take short-maturity liabilities and invest in long-maturity assets

insolvent

the value of the bank’s assets is less than the value of its liabilities

solvent

the value of the bank’s assets is greater than the value of its liabilities

bank run

when a bank experiences an extraordinarily large volume of withdrawals driven by a concern that the bank will run out of liquid assets with which to pay withdrawals

money

the asset that people use to make and receive payments when buying and selling goods and services

medium of exchange

an asset that can be traded for goods and services

store of value

an asset that enables people to transfer purchasing power into the future

unit of account

a universal yardstick that is used for expressing the worth (price) of different goods and services

fiat money

something that is used as legal tender by government decree and is not backed by a physical commodity, like gold or silver.

money supply

adds together currency in circulation, checking accounts, savings accounts, travelers’ checks, and money market accounts. It is sometimes referred to as M2

quantity theory of money

the growth rate of the money supply and the growth rate of nominal GDP are the same over the long run

deflation

the rate of decrease of a price index

seigniorage

Government revenue obtained from printing currency

real wage

the nominal wage divided by a price index

central bank / monetary policy

the government institution that monitors financial institutions, controls certain key interest rates, and indirectly controls the money supply

Federal Reserve Bank / Fed

the name of the central bank in the United States

liquidity

funds available for immediate payment

federal funds market

the market where banks obtain overnight loans of reserves from one another

federal funds rate

the interest rate that banks charge each other for overnight loans in the federal funds market

Interests on Reserves (IOR)

Private banks that hold reserves at the Fed

federal funds market equilibrium

The point where the supply and demand curves cross in the federal funds market

open market operations

By buying or selling government bonds, the Fed shifts the vertical supply curve in the federal funds market and thereby controls the level of reserves

long term real interest rate

long-term nominal interest rate minus the long-term inflation rate

realized real interest rate

the nominal interest rate minus the realized rate of inflation

expected real interest rate

the nominal interest rate minus the expected rate of inflation

inflation expectations

Economic agents’ beliefs about future inflation rates