ap macro vocab 4

demand deposit (bank deposit)

demand deposit (bank deposit)

a claim on a bank that obliges the bank to give the depositor his or her cash when demanded

discount rate

The interest rate on the loans that the Fed makes to banks

excess reserves

reserves greater than the required amounts

federal funds rate

the interest rate at which banks make overnight loans to one another

fractional reserve banking

a banking system that keeps only a fraction of funds on hand and lends out the remainder

loanable funds market

a hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders

M1

currency, demand deposits, traveler's checks, and other checkable deposits

M2

All of M1 + less immediate (liquid) forms of money to include savings, money market mutual funds, and small denomination time deposits.

M3

The broadest component of the money supply. Equal to M2 plus large time deposits.

monetary policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

money market

market in which money is lent for periods of less than a year

open-market operation

The purchase and sale of U.S. government bonds.

required reserves (reserve requirements)

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

actual (bank) reserves

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

bonds

Certificates of debt that carry a promise to buy back the bonds at a higher price

capital inflow

the net inflow of funds into a country

commodity money

objects that have value in themselves and that are also used as money

commodity-backed money

a medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods

discount window

an arrangement in which the Federal Reserve stands ready to lend money to banks in trouble

federal funds market

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

fiat money

money without intrinsic value that is used as money because of government decree

financial asset

claim on the property or income of a borrower

fisher effect

an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged

illiquid

not easily transferable to money

liability

an amount owed

liquid/liquidity

The ability to turn any form of money into cash

medium of exchange

an item that buyers give to sellers when they want to purchase goods and services

money multiplier

the amount of money the banking system generates with each dollar of reserves

monetary base

the sum of currency in circulation and bank reserves

national savings

the sum of private savings and the budget balance, is the total amount of savings generated within the economy

physical asset

a claim on a tangible object that gives the owner the right to dispose of the object as he or she wishes

rate of return

the percentage of increase in the value of your savings from earned interest

reserve ratio

the fraction of deposits that banks hold as reserves

savings-investment spending identity

savings and investment spending are always equal for the economy as a whole

store of value

an item that people can use to transfer purchasing power from the present to the future

T-account

An accounting device used to analyze transactions

unit of account

a means for comparing the values of goods and services

velocity of money

the average number of times per year each dollar is used to purchase final goods and services