ap macro unit 4

asset

any resource that is of value that can be converted into cash

demand deposits

common financial assets like checking and savings accounts, can be withdrawn as needed

equity

investors who buy stocks become partial owners of a company and share in its profits and losses

liquidity

the ease with which assets can be converted to cash

securities

investments traded on the secondary (stock) market

bond

a promise by a corporation or government to repay a specified sum at the end of a specific number of years, along with annual interest

derivative

a financial contract that derives its value from the value of another asset

risk

the danger of losing money

credit risk

danger associated with lending money

liquidity risk

securities or assets that cannot be sold/bought fast enough to cut losses

speculative risk

a chance of loss, no loss, or gain

foreign investment risk

risk of investing in foreign markets

rate of return

yield in percent

time value

how the value of money changes over time

loan

money lent by one party to another with the understanding that it will be repaid at a future date, along with interest

the Federal Reserve System (Fed)

the central bank of the United States

the U.S. Treasury

borrows money for the government by selling fixed-income investments for various term lengths

the Financial Industry

comprised of the banking securities and commodities insurance and real estate sectors

Annual Percentage Rate (APR)

the percentage return that is advertised for bank deposits, loans, and bonds

nominal interest rate

doesn't take inflation rate into account

real interest rate

adjusts the nominal interest rate for inflation

real interest rate \=

nominal interest rate - inflation rate

money

anything that most people are willing to accept as payment for goods and services

medium of exchange

something that buyers give to sellers when they purchase goods and services

unit of account

provides a convenient standard for expressing the values of different items

store of value

people can save money for future use

currency

the money used in a particular country as a medium of exchange

monetary unit

the basic form of currency in a country and may be issued in various denominations of the basic unit

commodity money

money that gets its value from the substance it is made of

representative money

its value comes from the commodity is represents

gold standard

guaranteed that governments would redeem paper money for gold

the Barter System

goods and services are traded directly

fiat money

its value comes from the confidence people have in the government that issues it

money supply

the total amount of money in circulation

M0 (monetary base)

measure of all the currency in circulation kept by banks and other institutions in their accounts at the federal reserve

M1

measure of currency held by the public or in fully liquid demand deposits and savings accounts

M2

M1 + money market deposit accounts, CDs, + other bank reserves

depository institution

holds funds or securities for depositors

commercial banks

nations most important financial institution

credit union

a nonprofit financial institution that is owned by its members and organized for their benefit

deposits

money placed into a bank account

withdrawal

money taken out of a bank account

balance sheet

the financial statement that summarizes the assets, liabilities, and owners' equity at a specific point in time

reserve requirement

the percentage of deposits that banking institutions must hold in reserve

excess reserves

reserves greater than the required amounts

fractional reserve banking

banks must hold a portion of their depositors' money in reserve

money multiplier

the amount of money a bank generates with each dollar

money multiplier \=

1/reserve ratio

transaction demand for money

people hold money for everyday transactions

asset demand for money

people hold money since it is less risky than other assets

there is an \____ relationship between the interest rate and money demanded

inverse

money demand shifters

1. Change in price level
2. Change in income
3. Change in technology

monetary policy

the setting of the money supply by policymakers in the central bank

money supply shifters

1. reserve requirement
2. discount rate
3. open market operations

Federal Funds Rate (FFR)

the interest rate that a bank must pay on an overnight loan from another bank

interest on reserves (IOR)

the interest rate that the Fed pays commercial banks to hold reserves

administered rates

interest rates set by the Fed rather than determined in a market

discount rate

when the central bank charges commercial banks interest for borrowing money