AP MACROECONOMICS: UNIT 4 FINANCIAL ASSETS

Demand Deposit

A bank account, the funds of which may be withdrawn immediately at the depositor's request; also known as a checking account.

Time Deposit

A financial asset stored at an institution for an agreed upon term in return for interest.

Bond

A loan in which the borrower agrees to pay the lender interest over an agreed upon period of time and then repay the full principal (original amount borrowed).

Stock Share

Ownership of a fraction of a company, also known as equity.

Financial Asset

A claim that entitles the holder of the claim to future income from the issuer of the claim.

Liability

A debt.

Liquidity

How quickly a financial asset can be converted to cash.

Rate of Return

How well an asset holds or increases its value over time in light of inflation.

Risk

The possibility of gain or loss accepted in investing.

Dividend

A regularly disbursed share of a company's profits paid to its shareholders proportionately.

Nontransferable

Cannot be sold or given to another person or company.

Capital Gains

Profits acquired through the sale of an asset.

If the interest rate on new bonds goes up

The price of previously issued bonds will go down

If the interest rate on new bonds goes down

The price of previously issued bonds will go up

Face Value

The amount of money originally given by a bond purchaser, which they are entitled to when the bond reaches maturity.

Nominal Interest Rate

The advertised price (interest rate) charged to borrow money, not adjusted for inflation.

Real Interest Rate

The price (interest rate) paid for the borrowing of money, after adjusting for the impact of inflation.

Fixed-Rate Loans

An interest rate charged by a creditor to borrow money that does not change due to economic conditions like high inflation.

The Fisher Equation

Nominal Interest Rate = Expected Real Interest Rate + Expected Inflation

Money

Any asset that is accepted as a means of payment—can be easily used to purchase goods and services.

Double Coincidence of Wants

An idea in economics where an exchange of goods is dependent on each party to the transaction being willing to accept the other's good as payment for their own without any use of money (e.g., an old car traded for a custom gaming desktop).

MUS

Medium of exchange, a standard Unit of account, and a Store of value.

Intrinsic Value

In the context of money, the market price a commodity could be sold for; so paper fiat money has little to no intrinsic value.

Currency

Paper issued by a central bank or government that is used as money; sometimes coins are included in the definition of currency.

Fiat

A command or decree, in modern economics the basis for a currency's value.

Checking Account

A deposit with a bank in which direct withdrawals can be made; part of the M1 measure of the money supply.

Savings Account

A bank account that includes certain withdrawal limitations in return for gaining interest on deposits.

Time Deposit

A financial asset stored at an institution for an agreed upon term in return for interest.

Commodity

A good that is highly fungible, that is, interchangeable with identical items; examples include oil, eggs, and most relevant in macroeconomics, currency notes and coins.

M0

The monetary base, consisting of cash and coins in circulation and bank reserves; also sometimes abbreviated MB.

M1

Circulating cash and coin plus demand deposits plus savings accounts and other near monies; also known as the money supply.

Near Money

A financial asset that is not used as a medium of exchange directly but is highly liquid, that is it can be quickly converted to cash.

Money Market Mutual Fund

An ongoing mutual fund that invests in relatively safe short-term loans, generally to businesses and the government.

M2

M1 plus time deposits such as CDs.

Bank Balance Sheets

A list of a financial institution's assets and liabilities, where assets consist mainly of loans and investments and liabilities consist mainly of deposits and borrowing.

Fractional Reserve Banking

The system in which depository institutions keep a fraction of deposits for customer withdrawal and loan out the rest.

Bank Reserves

Money deposited at a bank that is not loaned out but kept for depositor withdrawal; may be kept in the bank's vault or stored at the central bank.

Money Multiplier

The ratio of the money supply to the monetary base; it effectively increases the money supply by the product of its value and any change in excess bank reserves.

Avoid double counting the initial deposit

The expansion of the money supply comes from new excess reserves and the new loans that come from them.

Money Demand

The desire to hold onto currency or liquid assets instead of investing.

Transactions Demand

In the money market, seeking money to purchase goods or services. Transactions demand is highly sensitive to changes in nominal income.

Asset Demand

In the money market, the pursuit of money as a store of value as a precaution or speculation. Asset demand is highly sensitive to changes in nominal interest rates.

Money Supply

The total amount of money in circulation in an economy. It is independent of the nominal interest rate, therefore the supply curve for money is a vertical line.

Money Market

The interaction of supply and demand for liquid money with nominal interest rates as the price.

Monetary Policy

The central bank's use of the money supply and/or its administered interest rates to intervene when there is a negative output gap or inflationary spiral.

Discount Rate

The interest rate that banks must pay to borrow money from the central bank.

Open Market Operations

The central bank's buying and selling of government bonds and other types of securities.

Federal Reserve Bank of The United States

The central bank of the United States, created by Congress as an independent agency to promote the health of the economy through banking regulation and monetary policy.

The Fed’s Three Goals

1. Maximum employment (NRU)

2. Stable prices

3. Moderate long-term interest rates

Federal Funds Rate

Banks lend each other money from their excess reserves.

Ample Reserves

No Required Reserves

Monetary Policy with Ample Reserves

Target Policy Rate in the Reserve Market

Loanable Funds Market

A model describing the behavior of borrowers, who are the demanders of funds, and savers, who are the suppliers of funds (like a Bank Reserves Market).

National Savings

In a closed economy (no international trade), the sum of public savings (from government budget surplus) and private savings (from households).

National Investment

In an open economy (international trade), the sum of national savings and net capital inflows.