APMacro Unit 4

Barter system

Goods and services are traded directly. There is no money exchanged. (highly inefficient in today's modern and advanced economy)

Double coincidence of wants

Exchange between two people, where both each want one good or service that the other person can provide. How the barter system works.

Medium of exchange

Money acts as an intermediary between the buyer and the seller.

Store of value

Money allows you to store purchasing power for the future.

Unit of account

Money measures the value of all goods and services and allows for comparison of value between various goods and services.

Commodity money

Goods that also have value from their use as something else other than money (i.e. can be used for something else) ex: gold, silver, cowrie shells, cigarettes, even cocoa beans.

Fiat money

Money that has no intrinsic value, but it is declared by a government to be the legal tender of a country.

Liquidity

Ease with which an asset can be accessed and used as a medium of exchange.

Federal Reserve Bank (the Fed)

Central bank of the US. is a bank regulator and is responsible for monetary policy.

Demand deposits

Monies held in checking accounts. The bank must give the deposit holder his money when a check is written or a debit card is used. Part of M1 supply.

Savings deposits

Bank accounts that you cannot write a check from directly, generally money to be kept aside or saved. You can easily withdraw money cash from these accounts at an ATM or bank. Part of M2 supply.

Net worth

Total assets- total liabilities

Financial Sector

Network of institutions that link borrowers and lenders including banks, mutual funds, pension funds and other intermediaries.

Asset

Any item of economic value that can be converted into cash.

Liability

A legal debt or financial obligation that must be paid back.

Loan

An agreement between a lender and a borrower.

Interest rate

The percentage rate that a borrower must pay for taking out a loan.

Nominal interest rate

Interest rate before taking inflation into account.

Real interest rate

Interest rate after allowing for inflation

Real ir = Nominal ir - inflation rate

Formula for real interest rate

M1 Money

A measure of money supply that only includes highly liquid assets; cash, checking account deposits (demand deposits) and savings and money market accounts.

M2 Money

A measure of money supply that includes all elements of M1 as well as "near money"; savings accounts, money market funds, mutual funds, CDs, etc.

Bonds

Loans, or IOUs, that represent debt that the government, business or individual must repay the lender. Also called securities.

Stocks

Represent ownership in a corporation.

Maturity Date

Date on which the principal amount of a bond or another debt instrument becomes due.

Face value

For bonds, the amount paid to the holder at maturity.

Fractional Reserve Banking

When banks hold only a small portion of deposits to cover potential withdrawals and then loans the rest of the money out.

Income

Money earned from doing work (wages) or received from personal investments.

Liquid asset

An asset that can quickly and easily be converted into cash

Illiquid asset

An asset that cannot quickly be converted into cash without significant loss of value

Expansionary Monetary Policy

When the Fed increases the money supply, causing interest rates to fall, increasing consumer and business spending.

Contractionary Monetary Policy

When the Fed decreases the money supply, causing interest rates to rise, decreasing consumer and business spending.

Federal Open Market Committee (FOMC)

Committee within the Federal Reserve System responsible for overseeing open market operations.

Monetary Policy

Actions of the central bank to impact the money supply or interest rates to achieve economic goals.

Money Supply

Cash in circulation and demand deposits. Also known as M1.

Reserve Ratio

The percentage of deposits banks must hold in reserve by law. In the US this is currently 0%.

Discount Rate

The interest rate the Federal Reserve charges commercial banks. The rate helps set a ceiling on the Federal Funds rate.

Open Market Operations

When the Federal Reserve buys or sells government bonds (treasury bonds) to private commercial banks

Money multiplier

The amount of money the banking system generates with each dollar of required reserves.

1 / Reserve Requirement (RR)

Formula for the fractional banking multiplier

FDIC

Deposit insurance that guarantees a customer's bank deposits up to $250,000

Leakages

Income which exits an economy rather than remaining in it.

Excess reserves

Amount above required reserves, also known as loanable funds.

Required reserves

Minimum amount of demand account reserves that must be held by a commercial bank, either as vault cash or as reserves at the Fed.

Balance sheet

Shows the specific assets and liabilities.

Owner's equity

Money owed to the owners or shareholders of a company

Crowding out

Increased interest rates due to government deficit spending that discourages consumers and businesses to borrow.

Loanable funds

Funds that are available for borrowing, also known as excess reserves.

Federal funds rate

The interest rate at which depository institutions lend excess reserve balances at the Fed to other depository institutions overnight.

Deposits

Money customers have put into the bank.

Transaction Demand

When you demand money to go buy something

Asset Demand

When you demand money due to a preference for a liquid asset vs. an illiquid asset.

Bank run

when people lose confidence in a bank and rush to withdraw their money

Demand for Money

Equals transaction demand plus asset demand.

Money

M1+M2

Fiscal Policy

Actions of Congress to impact the economy

Monetary Policy

Actions of the Central Bank to impact the economy

Buy Big Sell Small

A phrase to help you remember that when the Fed though open market operations buys bonds, the money supply increases (gets bigger), and when the fed sells bonds, the money supply decreases (gets smaller).

monetary base

the sum of currency in circulation and bank reserves. Also known as M0.

limited reserves

banking system structured so that changes to M1 can effectively change the nominal interest rate (NIR)

Ample reserves

A sizable level of reserves in the banking system such that small adjustments to M1 do not change the nominal interest rate (NIR)

interest on reserves (IOR)

is the rate at which the Federal Reserve Banks pay interest on reserve balances. Sets a floor on the federal funds rate.