AP Econ Unit 4 Vocabulary

Interest Rate

the “price” of money

Savings-Investment Spending Identity

total savings in an economy must equal total investment spending

Budget Surplus

a government, organization, or individual's income—primarily from tax revenue in the public sector—exceeds its expenditures over a specific period

Budget Deficit

occurs when a government's total expenditures exceed its total revenue during a specific fiscal year, resulting in a shortfall that requires borrowing

Budget Balance

when total government revenues equal or exceed total expenditures in a given fiscal period

National Savings

the total income in an economy that remains after accounting for private consumption and government purchases

Capital Inflow

the net movement of foreign money into a domestic economy, representing the purchase of domestic assets or direct investment by foreign residents

Wealth

the total net value of all tangible and intangible assets owned by an individual, household, or nation, minus all outstanding debt

Financial Asset

a written claim where buyers have the right to future income from sellers

Physical Asset

tangible, non-monetary items with material value used by organizations to produce goods, provide services, or generate revenue

Liability

something you owe

Transaction Costs

analyzes how companies determine whether to make products internally (hierarchy) or buy them from the market, aiming to minimize costs associated with transactions

Financial Risk

how likely financial assets are to lose value

Diversification

the process of expanding an economy’s range of industries and markets, shifting away from reliance on a single income source or commodity, such as oil or agriculture

Liquid

how quickly assets can be converted into cash without losing value

Illiquid

an investment or property that cannot be quickly converted into cash at its fair market value, typically taking longer than 24 to 72 hours to sell

Loan

a lender provides money to a borrower

Default

the failure of a borrower to make required payments—principal or interest—on a debt obligation, or the breach of a covenant

Loan-Backed Securities

fixed-income financial instruments created by bundling pools of debt—such as car loans, student loans, or credit card debt—into marketable bonds

Financial Intermediary

an entity—such as a bank, insurance company, or mutual fund—that acts as a middleman between savers and borrowers

Mutual Fund

a financial asset whose value is derived from ownership of other financial assets such as stocks

Pension Fund

large, pooled investment vehicles—often independent legal entities—established by employers, unions, or governments to manage contributions and finance employee retirement benefits

Life Insurance Company

a financial institution that acts as a risk-pooling mechanism, collecting premiums from policyholders to pay beneficiaries in the event of the insured's death

Bank Deposit

money placed into a deposit account at a banking institution

Bank

a financial intermediary and regulated institution that accepts deposits from the public, creates demand deposits, and makes loans to individuals and businesses

Money

any generally accepted medium of exchange used to purchase goods, services, or settle debts, functioning as a store of value and a unit of account

Currency in Circulation

currency outside of the US Treasury, Federal Reserve Banks, and the value of depository institutions

Checkable Bank Deposits

highly liquid, demand-deposit bank accounts that allow holders to withdraw funds or make payments immediately

Money Supply

currency in circulation + demand deposits + savings account + (traveler’s check)

Medium of Exchange

money is used to exchange goods and services

Store of Value

money holds power over time

Unit of Account

people commonly accept money as a way to set prices

Commodity Money

medium of exchange that has value aside from its value as money

Commodity-Backed Money

currency that can be directly exchanged for a fixed amount of a physical commodity held in reserve

Fiat Money

has value because the government said so

Monetary Aggregate

total measures of the money supply in an economy, categorized by liquidity, including currency and bank deposits

Near-moneys

highly liquid, non-cash financial assets that can be quickly converted into cash with little to no loss in value

Present Value

the current worth of a future sum of money or stream of cash flows, discounted at a specific rate of return

Net Present Value

a financial metric that calculates the difference between the present value of cash inflows and outflows over time, discounting future money to today's terms to assess investment profitability

Bank Reserves

the cash, vault currency, or deposits that commercial banks hold with a central bank rather than lending out, acting as a crucial liquidity buffer

T-account

a visual, T-shaped representation of a general ledger account used in accounting to track financial transactions

Reserve Ratio

percentage of money banks must hold in reserve

Required Reserve Ratio

the percentage of DD banks must hold in reserves (roughly 10%)

Bank Run

an economic phenomenon that occurs when a large number of depositors simultaneously withdraw their funds from a financial institution, driven by fears that the bank is or will become insolvent

Deposit Insurance

a financial safety net mechanism that guarantees bank depositors' funds up to a set limit if a bank fails. Economically, it prevents "bank runs" by eliminating the incentive for depositors to rush to the bank, thereby maintaining financial stability and confidence in the banking system

Reserve Requirements

a central bank regulation that sets the minimum amount of cash (reserves) commercial banks must hold against customer deposits, rather than lending it out

Discount Window

a Federal Reserve lending facility that allows depository institutions to borrow reserves, usually overnight, to manage short-term liquidity shortfalls

Excess Reserves

the percentage of DD banks choose to hold on to; can be loaned out to individuals and businesses (roughly 10%)

Monetary Base

the total amount of currency in circulation plus the total reserves held by commercial banks in their accounts at the central bank

Money Multiplier

used to determine maximum changes to the banking system when deposits or withdraws of cash occur

Central Bank

a public institution managing a nation's currency, money supply, and monetary policy to ensure financial stability, control inflation, and foster economic growth

Commercial Bank

stores your money and pays you interest

Investment Bank

a specialized financial institution that acts as an intermediary, helping corporations and governments raise capital by underwriting and issuing debt or equity securities

Savings and Loan (thrift)

a financial institution, often mutually owned or locally focused, that specializes in collecting consumer savings deposits and providing home mortgage loans

Leverage

the use of borrowed capital (debt) or financial instruments to increase the potential return on an investment

Balance Sheet Effect

how changes in asset prices, interest rates, or exchange rates impact a firm’s or country’s net worth

Vicarious Cycle of Deleveraging

occurs when individuals, businesses, or governments reduce debt (deleverage) simultaneously, leading to a contraction in spending and income that further reduces the value of assets and makes debt harder to pay off

Subprime Lending

the extension of credit to borrowers with high-risk profiles

Securitization

the financial process of pooling illiquid assets and transforming them into tradable, interest-bearing securities sold to investors

Federal Funds Market

an unsecured interbank market where commercial banks, government-sponsored enterprises, and foreign banks lend excess reserves held at the Federal Reserve to other institutions needing liquidity

Federal Funds Rate

the interest rate commercial banks charge other commercial banks to borrow money

Discount Rate

the interest rate the banks must pay to borrow money from the Central Bank

Open-market Operation

central banks buying and selling of government bonds

Short-term Interest Rates

the costs of borrowing or the returns on lending money for instruments with maturities of one year or less

Long-term Interest Rates

the yields on financial assets with maturities exceeding one year, commonly benchmarked by 10-year government bonds

Money Demand Curve

when interest rates are high, the quantity of money demanded decreases (vice versa)

Liquidity Preference Model of the Interest Rate

macroeconomic framework developed by John Maynard Keynes (1936) that posits interest rates are determined by the demand for and supply of money in an economy

Money Supply Curve

controlled by a country’s central bank; acts independently of the nominal interest rates

Loanable Funds Market

how much money in the form of a loan consumers, businesses, governments are requiring

Rate of Return

how well they protect against inflation and/or generate income for the power

Crowding Out

an economic theory where increased government spending or borrowing reduces private sector investment and consumption

Fisher Effect

an equation that helps us calculate the real rate of return