Unit 4 AP ECON EC - Kaavya Kaka

Interest Rate

The price paid for borrowing money, usually expressed as a percentage of the loan amount.

Savings-Investment Spending Identity

The idea that total savings in an economy always equals total investment

Budget Surplus

When government revenue exceeds government spending

Budget Deficit

When government spending exceeds government revenue

Budget Balance

The difference between government revenue and spending

National Savings

The total amount of savings generated within a nation, including both private and public savings

Capital Inflow

Money flowing into a country from foreign investors

Wealth

The total value of all assets owned minus debts

Financial Asset

A paper claim that entitles the owner to future income, like a stock or bond

Physical Asset

A tangible object with value, like a house or car

Liability

A financial obligation or debt owed to another party

Transaction Costs

The expenses of making a deal, like fees or time spent

Financial Risk

The chance that an investment will result in a loss

Diversification

Spreading investments across different assets to reduce risk

Liquid

Easily converted into cash without losing value

Illiquid

Not easily converted into cash without a loss in value

Loan

An agreement where a lender gives money to a borrower to be repaid with interest

Default

Failure to repay a loan as promised

Loan-Backed Securities

Investments created by combining many individual loans into one financial product

Financial Intermediary

An institution that connects savers and borrowers, like a bank

Pension Fund

A fund that collects and invests money to provide retirement income

Mutual Fund

A company that pools investors’ money to buy a variety of financial assets

Life Insurance Company

A company that provides payments to beneficiaries when the insured person dies

Bank Deposit

Money placed into a bank account for safekeeping

Bank

A financial institution that accepts deposits and makes loans

Money

Anything generally accepted as a medium of exchange

Currency in Circulation

Cash held by the public outside banks

Checkable Bank Deposits

Bank account balances that can be accessed by writing checks or using debit cards.

Money Supply

The total amount of money available in the economy.

Medium of Exchange

Something accepted as payment for goods and services

Store of Value

Something that keeps its value over time

Unit of Account

A standard measure used to set prices and record debts

Commodity Money

Money that has value because it is made of something valuable, like gold or silver

Commodity-Backed Money

Money with no intrinsic value but backed by something valuable, like gold

Fiat Money

Money that has value because the government says so

Monetary Aggregate

A measure of the total money supply in the economy

Near-moneys

Assets that can easily be converted into cash but aren’t used directly for payments

Present Value

The value today of money that will be received in the future

Net Present Value

The present value of future benefits minus the present value of costs

Bank Reserves

The money banks keep on hand or with the central bank to meet withdrawals

T-account

A simple table showing a bank’s assets and liabilities

Reserve Ratio

The fraction of bank deposits kept as reserves

Required Reserve Ratio

The minimum fraction of deposits that banks must hold in reserve by law.

Bank Run

When many depositors withdraw money from a bank at once due to fear it will fail

Deposit Insurance

Government guarantee that bank deposits will be repaid even if the bank fails

Reserve Requirements

Rules set by the central bank about how much banks must hold in reserve

Discount Window

The central bank’s lending facility for banks that need short-term funds

Excess Reserves

Any reserves held by banks above the required amount

Monetary Base

The total of currency in circulation plus bank reserves

Money Multiplier

The ratio showing how much money the banking system creates with each dollar of reserves

Central Bank

The institution that manages a nation’s money supply and monetary policy

Commercial Bank

A bank that accepts deposits and makes loans to individuals and businesses

Investment Bank

A financial institution that helps companies raise money and invests in financial markets.

Savings and Loan (Thrift)

A bank that mainly provides home loans and takes savings deposits.

Leverage

Using borrowed money to increase potential returns on investment.

Balance Sheet Effect

The impact of asset price changes on a firm’s net worth

Vicious Cycle of Deleveraging 

When asset sales to pay off debt cause prices to fall, worsening debt problem

Subprime Lending

Risky loans made to borrowers with poor credit histories

Securitization

The process of turning loans or other financial assets into securities that can be sold

Federal Funds Market

The market where banks lend reserves to each other overnight.

Federal Funds Rate

The interest rate banks charge each other for overnight loans

Discount Rate

The interest rate the central bank charges commercial banks for loans

Open-market Operation

The buying or selling of government bonds by the central bank to change the money supply

Short-term Interest Rates

Interest rates on loans or financial assets that mature within a year

Long-term Interest Rates

Interest rates on loans or bonds that mature after more than a year

Money Demand Curve

A graph showing the relationship between interest rates and the quantity of money demanded

Liquidity Preference Model of the Interest Rate

The theory that interest rates are determined by the supply and demand for money.

Money Supply Curve

A vertical line showing the amount of money available, set by the central bank

Loanable Funds Market

The market where savers supply funds and borrowers demand them

Rate of Return

The profit earned from an investment as a percentage of its cost

Crowding Out

When government borrowing drives up interest rates and reduces private investment

Fisher Effect

The principle that nominal interest rates rise with expected inflation