Honors Economics Unit 4 Vocabulary

Vocabulary flashcards covering monetary policy, banking, money demand, and macroeconomics concepts for Honors Economics Unit 4.

Stock

A share of ownership in a corporation, entitling the owner to a piece of the company's profits.

Bond

A certificate of indebtedness that represents an obligation to pay back loaned funds with interest.

Fiat Money

Money that has value because of government decree, rather than intrinsic value.

Functions of Money

Medium of exchange, unit of account, and store of value.

Money Supply

The total amount of monetary assets available in an economy at a specific time.

M1

The sum of currency in circulation, checkable deposits, and travelers checks.

Liquidity

The ease with which an asset can be converted quickly into cash without loss of value.

Transaction Demand

The amount of money people hold to buy goods and services.

Asset Demand

The amount of money people hold as a store of value rather than for immediate spending.

Money Demand

The total demand for holding cash, consisting of transaction and asset motivations.

Fractional Reserve Banking

A banking system in which banks hold only a portion of consumer deposits as reserves and lends out the rest.

Reserve Ratio

The fraction of total deposits that a bank actually holds as reserves.

Reserve Requirement

The legal minimum percentage of deposits that banks must hold in reserve.

Total T-Account Assets

Everything of value owned by a bank, including cash in vaults, reserves at the Fed, and outstanding loans.

Money Multiplier

Used to find the maximum change in the money supply from a change in reserves.

Expansionary Policy

Actions taken by a central bank to increase the money supply and lower interest rates to fight unemployment.

Contractionary Policy

Actions taken by a central bank to decrease the money supply and increase interest rates to combat inflation.

Open Market Operations

Central bank purchases or sales of government securities in the open market to influence the money supply.

Federal Funds Rate

The interest rate commercial banks charge one another for overnight loans of reserves.

Discount Rate

The interest rate that the Federal Reserve charges commercial banks for short-term loans.

Interest on Reserves

The interest rate the Federal Reserve pays commercial banks on the funds they hold in their reserve accounts.

Quantity Theory of Money

The proposition that an increase in the money supply leads to a proportional increase in the price level in the long run.

Equation of Exchange

Where supply times velocity equals price level times real output.

Velocity of Money

The rate at which money changes hands in an economy.