AP Macroeconomics Unit 4 Vocabulary

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