Studied by 0 peopleInterest Rate
the price, calculated as a percentage of the amount borrowed, charged by lenders to borrowers for the use of their savings
Wealth
the value of a household’s accumulated savings
Financial Asset
a nonphysical asset that entitles the buyer to future income from the seller
Physical Asset
a tangible object that the owner has the right to use or dispose of as they wish
Liability
a requirement to pay money in the future
Financial Risk
uncertainty about future outcomes that involve financial losses and gains
Liquid Asset
an asset that can be quickly converted into cash without much loss of value
Illiquid Asset
an asset that cannot be quickly converted into cash without much loss of value
Loan
a lending agreement between an individual lender and an individual borrower
Bond
an interest-bearing asset that represents a loan to a company or government
Stock
a type of equity that represents ownership of a company
Bank Deposit
a claim on a bank that obliges the bank to give the depositor their cash
Bank
a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance borrowers’ investment spending on illiquid assets
Nominal Interest Rate
the interest rate actually paid for a loan
Real Interest Rate
the nominal interest rate adjusted for inflation
Money
any asset that can easily be used to purchase goods and services
Money Supply
the total value of financial assets in the economy that are considered money
Medium of Exchange
an asset that individuals acquire for the purpose of trading for goods and services rather than for their own consumption
Store of Value
a means of holding purchasing power over time
Unit of Account
a measure used to set prices and make economic calculations
Commodity Money
a good used as a medium of exchange that has intrinsic value in other uses
Commodity-Backed Money
a medium of exchange with no intrinsic value, but whose ultimate value is guaranteed by a promise that it can be converted into valuable goods
Fiat Money
a medium of exchange whose value derives entirely from its official status as a means of payment
Monetary Aggregate
an overall measure of the money supply
Monetary Base/M0/MB
the total amount of currency (cash) in circulation or kept on reserve by commercial banks
M1
a monetary aggregate that includes currency in circulation, checkable bank deposits, and other liquid deposits
M2
a monetary aggregate that includes M1, plus less liquid “near monies” (financial assets that can be readily converted into cash)
Central Bank
a government institution that issues currency, oversees and regulates the banking system, controls the monetary base, and implements monetary policy
Open Market Operation/OMO
a purchase or sale of government debt (bond) by the central bank
Fractional Reserve Banking System
when only a fraction of bank deposits are backed by cash on hand and available for withdrawal
Bank Reserves
the currency that banks hold in their vaults plus their deposits at the central bank
Reserve Ratio
the fraction of bank deposits that a bank holds as reserves
Required Reserve Ratio
the smallest fraction of deposits that the central bank requires banks to hold
Reserve Requirements
rules set by the central bank that determine the required reserve ratio for banks
Required Reserves
the reserves that banks must hold, as mandated by the central bank
Excess Reserves
a bank’s reserves over and above its required reserves
Money Multiplier
the ratio of the money supply to the monetary base, indicates the total number of dollars created in the banking system by each $1 addition to the monetary base
Money Demand Curve
shows the relationship between the quantity of money demanded and the nominal interest rate
Money Supply Curve
shows the relationship between the quantity of money supplied and the nominal interest rate, independent of the nominal interest rate
Inflation Targeting
when the central bank sets an explicit target for the inflation rate and adjust monetary policy in order to hit that target
Expansionary Monetary Policy
monetary policy that increases aggregate demand
Contractionary Monetary Policy
monetary policy that reduces aggregate demand
Overnite Interbank Lending Rate
the interest rate that banks charge other banks for overnight loans
Policy Rate
the central bank’s target range for an overnight interbank lending rate
Federal Funds Rate
the interest rate in the federal funds market, where banks make overnight loans to each other
Limited Reserves
when reserves are scarce and relatively small changes in the supply of reserves shifts the money supply curve and change the interest rate
Ample Reserves
when banks hold high levels of excess reserves and therefore changes in the supply of reserves doesn’t change the interest rate significantly
Discount Rate
the interest rate the central bank charges on loans to banks
Zero Bound
when the short-term interest rate has already been lowered to zero, and further economic stimulus requires the central bank to use nontraditional policy tools
Quantitative Easing/QE
an expansionary monetary policy that involves central banks purchasing longer-term government bonds and other private financial assets
Interest on Reserve Balances/IORB
the amount the central bank pays in interest to banks for their balances held in reserve
Monetary Policy Lags
the result of the time it takes to recognize a problem in the economy and the time it takes for a monetary policy action to take effect in the economy
Budget Surplus
the difference between tax revenue and government spending when tax revenue exceeds government spending
Budget Deficit
the difference between tax revenue and government sp;ending when government spending exceeds tax revenue
National Savings
the sum of private savings and the budget balance, the total amount of savings generated within the economy
Net Capital Inflow
the total inflow of foreign funds minus the total outflow of domestic funds to other countries
Loanable Funds Market
a hypothetical market that brings together those who want to lend money and those who want to borrow money
Investment Tax Credit
an amount that firms are allowed by law to deduct from their taxes based on their investment spending
Crowding Out
when a government deficit drives up the interest rate an dleads to reduced investment spending
Note
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