ap macro -- unit 2

commodity

an item of value (ex. gold)

representative money

represents a commodity (ex. receipt for gold bar)

fiat money

money by decree (government says it is money)

medium of exchange

money is universally useable to buy stuff

store of value

money represents value that is created

unit of measure

money provides a common value system

fiat money has

no intrinsic value

the majority of U.S. money is

electronic (fiat money)

spending

trading money for goods and services

saving

loaning money to earn interest

risk equals

return

interest

driving force for people buying things

best way to save money

buying bonds

bond

a promise to repay a principal amount borrowed at a future date

maturity date

date a bond principal is to repaid

discount rate

actual amount paid for the bond (less than actual worth of bond)

asset

something a business owns that generates revenue

liabilities

something a business owes money on

demand deposits

back account ‘payable on demand’ (checking account)

loan

document where a borrower promises to repay an amount + interest

reserves

money a bank gets from people + holds on to

required reserves

money that must be held in a bank (rate determined by the fed)

powers of the fed

set discount rate

set reserve requirement

selling/buying bonds

discount rate raised

fewer loans (money supply shrinks)

discount rate lowered

more loans (money supply grows)

reserve requirement raised

fewer loans (less excess reserves)

reserve requirement lowered

more loans (more excess reserves)

the fed buys bonds

more excess reserves, more loans, MS up

the fed sells bonds

fewer excess reserves, fewer loans, MS down

federal funds rate

the rate banks pay to other banks when borrowing

administrative rate

interest rate controlled by the fed (discount rate and IOR)

policy rate

federal funds rate

bonds

securities

bond prices drop

bond yields increase

bond prices rise

bond yields decrease

limited reserve environment

the fed sets the reserve requirement

ample reserve environment

no reserve requirement (up up / down down)

interest rate on bank reserves

IOR

IOR

interest rate fed pays to banks (replaces res req)

the federal funds rate is slightly ___________ than the discount rate

lower

the federal funds rate will be slightly ______ than the IOR

higher