AP Macro: Unit 4

Bank Reserves

The currency that banks hold in their vaults plus their deposits at the Federal Reserve

Bond

A loan in the form of an IOU that pays interest

Budget Balance

The difference between tax revenue and government spending

Budget Deficit

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

Capital Inflow

The total inflow of foreign funds minus the total outflow of domestic funds to other countries.

Commodity Money

A good used as a medium of exchange that has intrinsic value in other uses

Commodity-Backed Money

A medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods.

Contractionary Policy

A policy (fiscal or monetary) that reduces Aggregate Demand

Crowding Out

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

Excess Reserves

A bank's reserves over and above its required level.

Expansionary Policy

A policy (fiscal or monetary) that increases Aggregate Demand

Fiat Money

A medium of exchange whose value derives entirely from its official status as a means of payment

Financial Asset

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

Government Debt

The accumulation of past budget deficits, minus past government surpluses.

Illiquid

Describes an asset that cannot be quickly converted into cash without much loss of value.

Interest Rate

The price, calculated as a percentage of the amount borrowed, charged by lenders to borrowers for loans.

Investment Spending

Spending on new productive physical capital, such as machinery and structures, and on changes in inventories.

Liquid

Describes an asset if it can be quickly converted into cash without much loss of value.

Loan

A lending agreement between an individual borrower and an individual lender.

Medium of Exchange

An asset that individuals acquire for the purpose of trading for goods and services, rather than for their own consumption.

Monetary Policy

The central bank's use of changes in the quantity of money or the interest rate to stabilize the economy.

Money

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

Money Multiplier

Indicates the total number of dollars created in the banking system by each $1 addition to the monetary base; 1/Reserve Requirement

Nominal Interest Rate

The interest rate actually paid for a loan, not accounting for inflation.

Open-Market Operation

The purchase or sale of government debt (in the form of Bonds) by the Fed.

Real Interest Rate

The nominal interest rate minus the rate of inflation.

Reserve Requirement

Rules set by the Federal Reserve that determine the fraction of deposits that banks must hold.

Stabilization Policy

The use of government policy to reduce the severity of recessions and rein in excessively strong expansions.

Stock

A share in the ownership of a company held by a shareholder

Store of Value

A means of holding purchasing power over time

Transaction Costs

The expenses of negotiating and executing a deal

Unit of Account

A measure used to set prices and make economic calculations

Wealth

The value of a household's accumulated savings

Interest on Reserves (IOR)

The rate at which the Federal Reserve Banks pay interest on reserve balances.

Limited Reserves

Situation in which banks are not holding many excess reserves. Conventional Monetary Policy functions normally under this framework.

Ample Reserves

Situation in which banks are holding many excess reserves. Conventional Monetary Policy is not effective under this framework, and instead changes to the Interest on Reserves (IOR) are used to guide monetary policy.