AP Macroeconomics Unit 4

These flashcards cover essential vocabulary and concepts from Unit 4 of AP Macroeconomics, focusing on the financial sector.

Economic Growth

Comes from increases in human capital and physical capital.

Savings and Investment Spending

Savings = Investment Spending.

Financial Assets

Types include loans, bonds, loan-backed securities, stocks, and bank deposits.

Financial Intermediaries

Institutions like mutual funds, life insurance companies, pension funds, and banks that reduce transaction costs and provide liquidity.

Inflation Rate Calculation

Inflation rate = [(PL in Year 2 - PL in Year 1) / PL in Year 1] * 100.

Real Interest Rate Formula

Real interest rate = Nominal interest rate - actual interest rate.

Borrowers and Inflation

In higher than expected inflation, borrowers benefit as they repay loans with less valuable dollars.

Lenders and Inflation

Lenders lose in higher than expected inflation as they receive repayments in less valuable dollars.

Capital Inflow

Net inflow of funds into a country.

Liquid Assets

Assets that can be converted to cash without much loss of value.

Illiquid Assets

Assets that lose significant value when converted to cash.

Diversification

Investing in several different assets to avoid total loss.

Types of Money

Includes commodity money, commodity-backed money, and fiat money.

M1 Money Supply

Includes currency in circulation, traveler’s checks, and checkable bank deposits.

M2 Money Supply

Includes M1 plus near-moneys like savings accounts, time deposits, and small-denomination CDs.

Net Present Value

NPV = PV of current & future benefits - PV of current & future costs.

Bank Runs

When many depositors demand their money simultaneously, often caused by rumors of bank failure.

Deposit Insurance

Guarantees security for the first $250,000 of every bank account.

Money Multiplier Formula

Money multiplier = 1 / reserve ratio.

Money Market

A market that deals with short-term interest rates.

Aggregate Price Level Influence

Increase in aggregate price level increases money demand.

Liquidity Preference Model

Describes equilibrium in the money market when money demand equals money supply.

Fisher Effect

A rise in expected future inflation leads to a rise in the interest rate.

Crowding Out Effect

Government spending can lower investment spending.

Federal Reserve Functions

Includes providing financial services, supervising banking institutions, and conducting monetary policy.

Expansionary Monetary Policy

Involves decreasing required reserve ratio, lowering discount rates, and buying T-bills.

Contractionary Monetary Policy

Involves increasing required reserve ratio, increasing discount rates, and selling T-bills.