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58 Terms
Asset
Things you own that have value.
Physical Asset
Stuff you can touch, like a house or car.
Financial Asset
Paper or digital things that show you own something valuable, like stocks or bonds.
Liquidity
How quickly you can turn something into cash without losing value.
Example of Liquidity
Cash is super easy to use, but selling a house takes time.
Rate of Return
How much money you make from an investment.
Example of Rate of Return
If you invest $100 and get $110 back, your return is 10%.
Risk
The chance you could lose money.
Example of Risk
Stocks are risky, but savings accounts are safe.
Cash
Money you can spend right away.
Opportunity Cost of Cash
What you miss out on if you hold cash instead of investing it.
Demand Deposits
Money in a checking account you can use anytime.
Bonds
Loans you give to companies or the government, and they pay you back with interest.
Bonds & Interest Rates
When interest rates go up, old bonds are worth less.
Stocks
A piece of ownership in a company.
Interest Rate
The cost of borrowing money or what you earn from saving it.
Nominal Interest Rate
The interest rate you see on paper, not adjusted for inflation.
Real Interest Rate
The interest rate after subtracting inflation.
Real Interest Rate Formula
Real Interest Rate = Nominal Interest Rate - Inflation Rate.
Who is Helped by Inflation
People with fixed-rate loans (they pay back money that’s worth less).
Who is Hurt by Inflation
Savers and lenders (their money loses value).
What Is Money?
Something people use to buy things or save for later.
Functions of Money
Medium of Exchange, Store of Value, Unit of Account.
Medium of Exchange
Used to buy stuff.
Store of Value
Keeps its worth over time (e.g., saving money).
Unit of Account
Helps measure and compare prices.
Money Supply
All the money in the economy.
Money Aggregates
Groups of money based on how easily they can be spent.
M0 (Monetary Base)
Physical cash and reserves.
M1
Cash + checking accounts.
M2
M1 + savings accounts and short-term deposits.
Depository Institutions
Banks where people keep their money.
Fractional Reserve Banking
Banks keep part of your money and lend the rest.
Required Reserves
The part banks must keep and not lend out.
Excess Reserves
The extra money banks can lend.
Money Multiplier
How banks create more money by lending.
Money Multiplier Formula
1 Ă· Reserve Ratio.
What Is the Money Market?
A market for borrowing and lending money for short periods.
Money Demand
How much people want to hold cash (instead of saving or investing it).
Money Supply (in Money Market)
The amount of money the central bank makes available.
Equilibrium in Money Market
Where money demand and money supply meet, setting the interest rate.
Effect of More Supply on Interest Rates
More supply = lower interest rates.
Effect of Higher Demand on Interest Rates
Higher demand = higher interest rates.
What Is Monetary Policy?
How the central bank controls money and interest rates to help the economy.
Tools of Monetary Policy
Open-Market Operations, Reserve Ratio, Discount Rate, Federal Funds Rate.
Open-Market Operations
Buying/selling bonds to change the money supply.
Reserve Ratio
Adjusting how much banks must keep in reserves.
Discount Rate
The interest rate the central bank charges banks for loans.
Federal Funds Rate
The interest rate banks charge each other for overnight loans.
Expansionary Policy
Increases money supply to boost the economy.
Contractionary Policy
Decreases money supply to slow down inflation.
What Is the Loanable Funds Market?
A market where people save money and businesses borrow money to invest.
Demand for Loanable Funds
Comes from borrowers (e.g., businesses).
Supply of Loanable Funds
Comes from savers.
Equilibrium in Loanable Funds Market
Where demand and supply meet, setting the interest rate.
Open Economy Formula
Investment = National Savings + Net Capital Inflows.
National Savings
What people save in the country.
Net Capital Inflows
Money coming in from other countries.