AP Econ- Unit 4: Financial System & Fed Reserve

Bank reserves include what money in what 2 locations?

currency held in a vault plus deposits at the Federal Reserve.

M1 money supply

includes all currency in circulation plus checking accounts and traveler's checks

M2 money supply

Includes all of M1 money supply plus most savings accounts, money market accounts, and certificates of deposit.

open market operations

the purchase and sale of U.S. government bonds by the Fed

discount rate

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

federal funds rate

the interest rate at which banks make overnight loans to other banks (does not involve The Federal Reserve)

reserve ratio

the fraction of deposits that banks hold as reserves

excess reserves

a bank's reserves over and above its required reserves

money multiplier

1/reserve ratio

dividend

The portion of corporate profits paid out to stockholders

FOMC (Federal Open Market Committee)

12 member group that buys and sells the FED's securities

monetary base

the sum of currency in circulation and bank reserves (cold hard cash)

bank run

A situation in which many depositors simultaneously decide to withdraw money from a bank.

FDIC (Federal Deposit Insurance Corporation)

the government agency that insures customers' deposits if a bank fails up to $250,000

monetary policy

the setting of the money supply by policymakers in the central bank in order to manipulate interest rates

Federal Reserve System

The country's central banking system, which is responsible for the nation's monetary policy by regulating the supply of money and interest rates

Treasury Bills (T-Bills)

short-term debt obligations the U.S. government sells to raise money (Govt bonds)

bond

a formal contract to repay borrowed money with interest at fixed intervals to the holder of the bond (examples: Treasury Bills from the Government)

real interest rate

the nominal interest rate minus the inflation rate

nominal interest rate

the stated interest rate on a loan (anticipates but does not know the real rate of inflation)

financial asset

anything you own that makes money flow to you/your wallet at the end of the month/year

financial liability

anything you own that makes money flow away from you/your wallet at the end of the month/year

required reserve ratio

The minimum fraction of deposits banks are required by law to keep as reserves

expansionary monetary policy

Federal Reserve system actions to increase the money supply, lower interest rates, and expand real GDP; an easy money policy.

contractionary monetary policy

Federal Reserve system actions to decrease the money supply, increase interest rates, and lower real GDP; an tight money policy.

open market purchase

The purchase of U.S. government bonds by the FED to increase the money supply

open market sale

the sale of US government bonds by the FED to reduce the money supply

double coincidence of wants

the unlikely occurrence that two people each have a good the other wants

barter system

a system of exchange in which goods or services are traded directly for other goods or services without the use of money.

commodity money

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

commodity-backed money

a medium of exchange, typically paper money, whose value is guaranteed by a promise that it can be converted into valuable goods such as gold or silver on demand

fiat money

money that has value because the government has ordered that it is an acceptable means to pay debts