AP Macro Unit 4 CED 2

Money

An asset accepted as a means of payment.

Liquidity

The ease with which an asset can be converted into cash.

Rate of Return

The gain or loss of an investment over a specified period, expressed as a percentage of the investment’s cost.

Risk

The possibility of loss or gain on an investment.

Nominal Interest Rate

The interest rate without adjustment for inflation.

Real Interest Rate

The nominal interest rate adjusted for inflation.

Open-Market Operations

The buying and selling of government securities by the central bank to influence the money supply.

Fractional Reserve Banking

A banking system in which banks hold a fraction of deposits as reserves and lend out the remainder.

Money Multiplier

The ratio of the money supply to the monetary base.

Demand Deposits

Bank account balances that can be accessed on demand.

T-Account

A tool used to analyze a bank's balance sheet/A simple, visual tool used in accounting to show the effects of transactions on a company's financial position. It's called a "T-account" because of its shape, with a "T" dividing the account into two sides.

Equilibrium in the Money Market

Achieved when the quantity of money demanded equals the quantity of money supplied.

Central Bank

The authority responsible for managing a country's currency, money supply, and interest rates.

Fiscal Policy

Government policy regarding taxation and spending.

Monetary Policy

Central bank actions that manage money supply and interest rates.

Bank Reserves

The cash that banks keep on hand to meet customer withdrawals and central bank requirements.

Excess Reserves

The amount of reserves banks hold above the required minimum.

Required Reserves

The minimum amount of reserves a bank must hold against deposits.

Equilibrium Real Interest Rate

The interest rate at which the quantity of loanable funds demanded equals the quantity supplied.

Loanable Funds Market

A market where borrowers and lenders interact, affecting the equilibrium interest rate.

Surplus in the Money Market

Occurs when the quantity of money supplied exceeds the quantity demanded.

Shortage in the Money Market

Occurs when the quantity of money demanded exceeds the quantity supplied.

Investment Tax Credit

A tax incentive that allows businesses to deduct a certain percentage of investment costs from their taxes.

Aggregate Demand

The total demand for goods and services within an economy.

Currency in Circulation

Physical money that is in the hands of the public.

Monetary Base

The total amount of a country's currency that is either in circulation or held in reserve.

Macroeconomic Goals

Objectives set by policymakers to influence economic performance, such as low inflation and high employment.

Expected Inflation

The rate at which prices are anticipated to rise in the future.

Opportunity Cost

The loss of potential gain from other alternatives when one alternative is chosen.

Balancing the Federal Funds Rate

The interest rate at which depository institutions lend reserve balances to other depository institutions overnight.

Economic Output Gap

The difference between actual output and potential output in an economy.

Central Bank’s Discount Rate

The interest rate charged to commercial banks and other depository institutions on loans they receive from the central bank's discount window.

Money Demand Curve

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

Money Supply Curve

Graph showing the amount of money held in the economy at various interest rates.

Government Securities

Debt instruments issued by a government to support government spending.

Market Forces

The economic factors that affect the supply and demand for goods and services.

Economic Models

Simplified representations of complex economic processes.

Price Stability

A situation in which prices in an economy do not change much over time.

Quantitative Easing

An unconventional monetary policy used by central banks to stimulate the economy.

Interest on Reserves

The interest rate paid by the central bank on reserves held by commercial banks.

Adjustments in Interest Rates

Changes made to the nominal interest rates by the central bank to influence economic activity.

National Savings

The total savings of a nation's private and public sectors.

Equilibrium Quantity of Loanable Funds

The amount of loanable funds at the equilibrium interest rate.

Public Savings

The difference between government revenue and government spending.

Private Savings

The portion of households' income that is saved rather than spent.

Expanded Money Supply Effect

The increase in the amount of money in circulation in the economy as a result of monetary policy.