Unit 4 AP Macroeconomics Vocab

Financial Sector

Network of institutions that link borrowers and lenders

Asset

Anything tangible or intangible that has value

Interest rate

Amount a lender charges a borrower for borrowing money

Interest-bearing asset

Asset that earned interest over time like bonds

Liquidity

Ease with which an asset can be converted into a medium of exchange/money

Bonds

Loans or IOUs that represent debt by governments, businesses or individuals that must be repaid to the lender

Stocks

Represent ownership of a corporation and the owner is often entitled to a portion of the profit paid out as dividends

Real interest rate

Percentage increase in purchasing power that a borrower pays that is adjusted for inflation

Nominal interest rate

Percentage increase in money that the borrower pays that is not adjusted for inflation

Present value

Current worth of some future amount of money

Money

Anything generally accepted as payment for goods and services

Wealth

Total collection of assets

Income

Flow of earnings per unit of time

Commodity money

Something that performs the function of money and has intrinsic value like gold or cigarettes

Fiat money

Something that serves as money but has no other value or use like paper money

Purchasing power

The amount of goods and services a unit of money can buy

Fractional reserve banking

Bank holds a portion of deposits for withdrawals and loans out the rest

Demand deposits

Money deposited in a commercial bank

Required reserves

Percent that banks must hold by law

Excess reserves

 Amount that the bank can loan out

Balance sheet

A record of a bank's assets, liabilities, and net worth

Transaction demand for money

People hold money for everyday transactions

Asset demand for money

People hold money since it is less risky than other assets

Federal Reserve System/Board or The Fed

Nonpartisan government office that adjusts the money supply to influence the economy

Discount rate

The interest rate that the Fed charges commercial banks

Open market operations

When the Fed buys or sells government bonds to affect money supply

Federal funds rate

Interest rate that banks charge one another for one-day loans of reserves

Loanable funds market

Shows supply and demand of loans and the equilibrium real interest rate

Private saving

Amount that households save instead of consume

Public saving

Amount that the government saves instead of spends

National saving

Public saving + private saving

Capital inflow

Amount of money entering the country

Capital outflow

Amount of money leaving the country

Net capital inflow

Capital inflow - capital outflow

Private investment

Borrowing by businesses and consumers

Government investment

Deficit spending when government spending is greater than tax revenue

Real interest rate =

nominal interest rate - expected inflation

Nominal interest rate =

real interest rate + expected inflation

Present value of $X in 1 year =

$X/(1 + ir)^n

 Future value of $X in N years =

$X(1 + ir)^n

Money multiplier =

1/Reserve requirement (ratio)