AP Macro Unit 4 Monetary Policy

Money

any asset that can easily be used to purchase goods and services

Commodity Money

a good used as money that also has value independent of its use as money

Fiat Money

money that has value because the government has ordered that it is an acceptable means to pay debts

Liquidity/liquid

asset that can be quickly converted into cash without much loss of value

Excess Reserves

a bank's reserves over and above its required reserves (that can be loaned out)

The Discount Rate

is the interest rate that the FED charges commercial banks.

Open Market Operations

is when the FED buys or sells government bonds (securities).

illiquid

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

liability

a requirement to pay money in the future

diversification

Spreading out investments to reduce risk

mutual fund

a financial intermediary that creates a stock portfolio and then resells shares of this portfolio to individual investors

bank deposit

a claim on a bank that obliges the bank to give the depositor his or her cash when demanded

money supply

the total value of financial assets in the economy that are considered money

medium of exchange

anything that is used to determine value during the exchange of goods and services

store of value

a means of holding purchasing power over time

unit of account

a measure used to set prices and make economic calculations

future value

the amount of money in the future that an amount of money today will yield, given prevailing interest rates

present value

the amount of money you would need to deposit now in order to have a desired amount in the future

reserve ratio

the fraction of bank deposits that a bank holds as reserves

required reserve ratio

The minimum fraction of deposits banks are required by law to keep as reserves

reserve requirement

rules set by the Federal Reserve that determine the required reserve ratio for banks

money multiplier

the amount of money the banking system generates with each dollar of reserves

federal funds rate

Interest rate banks charge each other for loans