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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.
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