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Financial Assets
Claims that allow buyers to future income from sellers
Stocks
An instrument that signifies ownership in a corporation
Bonds
Interest-bearing certificates used as a way for government or business to raise money
Mutual Fund
Open-ended investments that are professionally managed and consist of a variety of investment instruments
Diversification
Provides greater safety and reduces risk
Liquidity
Ease with which an asset can be converted into money
Money
Used to purchase goods and services
Wealth
An accumulation of savings overtime time by owning assets
Fiat Currency
Money that is not backed by anything of real value, intrinsically worthless
Real interest rate
Nominal interest rate - Inflation rate, adjusts for price level
Nominal interest rate
Real interest rate + Inflation rate, no adjusting for price level
M0 or monetary base
It includes currency and bank reserves
M1 or money supply
Currency, demand deposits, and saving deposits
M2
Consists of all of M1, time deposits less than $100,000, and some money market deposit accounts (MMDAs)
Capital stock
The value of accumulated capital by investors
Fractional reserve system
Banks hold only a fraction of deposit reserves as opposed to 100% of deposits
Required Reserve Rate/Ratio (RRR)
Percentage of money deposit that banks must hold
T-Account
Simplified accounting statement that shows the changes in the banks assets and liabilities through a fractional reserve system
Federal Open Market Committee (FOMC)
A committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks
Excessive reserves
Bank reserves in addition to required amounts
Money multiplier
The amount of money that the banking system creates in demand deposits with each dollar of reserves, found by taking the reciprocal of the RRR (1/RRR)
Discount rate
Interest rate on loans the Fed makes to banks during the discount window
Open market operations
The purchase or sale of bonds by the Fed on the open-market
Transactions demand for money
The demand for money because you need to buy stuff
Asset demand for money
The demand for money to save it
Total demand for money
Transactions demand + asset demand
Money market
The demand for money and supply of money
Federal funds rate/policy rate
Short-term interest rate that banks charge each other for overnight loans
Interest on reserve balances (IORB)
The interest rate that banks earn from the Fed on the funds they deposit in their reserve balance accounts at the Fed
Reservation rate
The lowest interest rate that banks are likely willing to accept for lending out their funds
Arbitrage
The simultaneous purchase and sale of funds in order to profit from a difference in interest rates
