AP Macro Unit 4 Vocab

Financial assets

Items of value that can be traded in financial markets, representing claims to future income or value.

Fiat money

Currency that has no intrinsic value and is not backed by a physical commodity, declared legal tender by the government.

Commodity money

Money that has intrinsic value, made of a commodity like gold or silver, which has value in itself.

Financial intermediary

An institution that connects borrowers with lenders, such as banks or insurance companies.

Fisher effect

The relationship between nominal interest rates, real interest rates, and inflation, where an increase in expected inflation leads to an equal increase in nominal interest rates.

Monetary base

The total supply of a country’s currency, including coins, paper money, and reserves at the central bank.

Money

A medium of exchange widely accepted for the purchase of goods and services.

Balance sheet

A financial statement showing a company’s assets, liabilities, and equity at a specific point in time.

Bank deposit

Funds placed in a bank account, used by the bank to lend to others, potentially earning interest for the depositor.

Bank reserves

The portion of deposits that must be held in reserve and not lent out.

Liability

A financial obligation or debt owed by a person or organization.

Bond

A debt security where the issuer borrows funds from investors and agrees to pay back the principal with interest.

Capital inflow

The movement of capital into a country from foreign investors in various forms.

Central bank

The institution responsible for managing a country’s monetary policy and regulating the banking system.

Demand deposits

Bank deposits that can be withdrawn at any time without advance notice.

Excess reserves

The amount of reserves held by a bank above the required minimum.

Federal funds market

The market where banks lend reserves to each other overnight on an unsecured basis.

Federal funds rate

The interest rate at which banks lend reserves to one another overnight.

Fractional reserve system

A banking system wherein banks are required to keep only a fraction of deposits as reserves.