AP Macroeconomics: Unit 4 Vocab

Page 275 of online textbook

Interest rate

the price, calculated as a percentage of the amount borrowed, charged by lenders to borrowers for the use of their savings for one year.

Savings–investment spending identity

an accounting fact that states that savings and investment spending are always equal for the economy as a whole.

Budget surplus

the difference between tax revenue and government spending when tax revenue exceeds government spending.

Budget deficit

government is “dissaving”: by spending more than its tax revenues, the government is engaged in the opposite of saving.

Budget balance

the difference between tax revenue and government spending (can be + or –).

National savings

Equal to the sum of private savings and the budget balance.

Wealth

the value of a household’s accumulated saving

Financial asset

A paper claim that entitles the buyer to future income from the seller

Physical asset

a claim on a tangible object that gives the owner the right to dispose of it as desired.

Liability

a requirement to pay money in the future

Transaction costs

the costs to individuals of making a deal.

Financial risk

uncertainty about future outcomes that involves financial gains and losses

Liquid assets

assets that can be quickly converted into cash without much loss of value (in contrast to illiquid assets, which are not easily converted).

Illiquid

describes an asset if it cannot be quickly converted into cash without much loss of value (ex: business, car, or home)

Loan

a lending agreement between an individual lender and an individual borrower

Financial intermediary

an institution that transforms the funds it gathers from many individuals into financial assets

Bank deposit

a claim on the bank, which is obliged to give you your cash if and when you demand it.

Bank

a financial intermediary that provides liquid financial assets in the form of deposits to lenders and uses their funds to finance borrowers’ investment spending on illiquid assets.

Money

any asset that can easily be used to purchase goods and services.

Money supply

the total value of financial assets in the economy that are considered money; currency in circulation and checkable bank deposits are included.

A medium of exchange

an asset that individuals use to trade for goods and services rather than for consumption.

A store of value

a means of holding purchasing power over time.

A unit of account

the commonly accepted measure individuals use to set prices and make economic calculations.

Commodity money

the medium of exchange was a good, normally gold or silver, that had intrinsic value in other uses.

Commodity-backed money

a medium of exchange with no intrinsic value whose ultimate value was guaranteed by a promise that it could always be converted into valuable goods on demand (ex: paper money).

Fiat money

money whose value derives entirely from its official status as a means of payment.

Monetary aggregate

overall measures of the money supply

Future value

The accumulation of interest turns any amount you have today into a greater sum

Present value

the present value of current and future benefits minus the present value of current and future costs.

Net present value

the present value of current and future benefits minus the present value of current and future costs.

Bank reserves

Currency in bank vaults and bank deposits held at the Federal Reserve

Reserve ratio

The fraction of bank deposits that a bank holds as reserves

Required reserve ratio

the smallest fraction of bank deposits that a bank must hold.

Bank run

a phenomenon in which many of a bank’s depositors try to withdraw their funds due to fears of a bank failure.

Reserve requirements

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

Excess reserves

a bank's reserves over and above the amount needed to satisfy the minimum reserve ratio.

Monetary base

the sum of currency in circulation and the reserves held by banks.

Money multiplier

it’s the ratio of the money supply to the monetary base. It tells us the total number of dollars created in the banking system by each $1 addition to the monetary base.

Central bank

an institution that oversees and regulates a country’s banking system and controls its monetary base.

Commercial bank

depository banks that accepted deposits and were covered by deposit insurance.

Investment bank

engaged in creating and trading financial assets such as stocks and corporate bonds but were not covered by deposit insurance because their activities were considered more risky.

Federal funds rate

the interest rate at which funds are borrowed and lent among banks in the federal funds market, plays a key role in modern monetary policy.

Discount rate

the interest rate the Federal Reserve charges on loans to banks.

Open market operation

a purchase or sale of government debt by the Federal Reserve.

Short-term interest rates

interest rates on financial assets that come due, or mature, within a year.

Long-term interest rates

interest rates on financial assets that mature, or come due, a number of years in the future.

Money demand curve

shows the relationship between the quantity of money demanded and the interest rate.

Money supply curve

shows the relationship between the quantity of money supplied by the Federal Reserve and the interest rate.

Loanable funds market

a hypothetical market that brings together those who want to lend money and those who want to borrow money.

Rate of return

(on a project) is the profit earned on the project expressed as a percentage of its cost.

Crowding out

occurs when a government deficit drives up the interest rate and leads to reduced investment spending.