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Household Wealth
the value of a household’s accumulated savings
Financial Asset
a nonphysical asset that entitles the buyer to future income from the seller
Financial Risk
uncertainty about future outcomes that involve financial losses and gains
Liquid
an asset that can be quickly converted to cash without much loss of value
Illiquid
an asset that cannot be quickly converted to 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
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
Medium of Exchange
the primary function of money, this is when money is used in a transaction to exchange for goods and services
Store of Value
another function of money, this is when money is held in savings for future use because of the belief it will hold purchasing power over time
Unit of Account
the last function of money, this is when money is used as a measure to set prices and make economic calculations
Commodity Money
a good used as a medium of exchange that has intrinsic value in other uses
Fiat Money
a medium of exchange whose value derives entirely from its official status as a means of payment
Monetary Base
also known as MO, this is the total amount of currency (cash) in circulation or kept on reserve by commercial banks
M1
monetary aggregate that includes currency in circulation, checkable bank deposits, and other liquid deposits
M2
monetary aggregate that includes M1 plus less liquid “near monies” (financial assets that can be readily converted into cash)
Fractional Reserve Banking
a banking system in which banks do not keep all of their deposits on reserve, but rather loan out some of their deposits
Bank Reserves
the currency that banks hold in their vaults put their deposits at the central bank
Required Reserve Ratio
also known as the reserve requirement, this is the percentage of deposits that a commercial bank must hold in reserves
Required Reserves
the reserves that a bank must hold, as mandated by the central bank
Excess Reserves
additional reserves a bank chooses to hold. these represent the funds available to banks to loan out to borrowers
Money Multiplier
the ratio of the money supply to the monetary base. it 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 - this curve is independent of the nominal interest rate
Monetary Policy
actions of a central bank used to stabilize the economy by influencing aggregate demand through changing interest rates
Expansionary Monetary Policy
monetary policy designed to increase aggregate demand
Contractionary Monetary Policy
monetary policy designed to decrease aggregate demand
Overnight Interbank Lending Rate
sometimes known as the policy rate, this is the interest rate that banks charge in the supply of reserves shifts the money supply and changes the interest rate
Limited Reserve System
a system where reserves are scarce, and therefore, relatively small changes in the supply of reserves shift the money supply and change the interest rate
Ample Reserve System
a system where banks hold high levels of excess reserves, and therefore, change in the supply of reserves does not change the interest rate significantly
Discount Rate
the interest rate the central bank charges on loans to banks
Open Markey Operations (OMOs)
the purchase or sale of government debt (bonds) by a central bank
Interest on Reserves
the amount the central bank pays in interest to banks for their balances
Budget Surplus
when tax revenue exceeds government spending
Budget Deficit
when government spending exceeds tax revenue
National Savings
the sum of private savings and the budget balance, is the total amount of savings generated within the country
Net Capital Inflow
equal to the total inflow of foreign funds minus the total outflow of domestic funds to other countires
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
