AP Econ Module 4 :(

I hate economics

Interest 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