AP MACRO CH 26-28

Financial Capital

Funds that are invested in physical or human capital, used for generating more money.

Gross Investment

Total spending on new capital assets, disregarding depreciation.

Net Investment

Gross investment minus depreciation, indicating actual growth in capital resources.

Depreciation

The decrease in value of capital goods over time due to use or obsolescence.

Loanable Funds Market

A market in which borrowers and lenders come together to determine the interest rate and the quantity of loans.

Interest Rate

The cost of borrowing or the return on savings, expressed as a percentage of the principal.

Crowding-Out Effect

A situation where increased public sector spending reduces or eliminates private sector spending.

Velocity of Circulation

The rate at which money is exchanged in an economy; the number of times one unit of currency is used to purchase goods and services.

Standard of Value

The function of money that provides a consistent measure of value for goods and services.

M1 and M2

M1 includes cash and other liquid assets, while M2 includes M1 plus savings accounts and time deposits.

Reserve Ratio

The fraction of deposits that a bank is required to keep in reserve and not lend out.

Monetary Base

The total amount of a currency that a central bank has in circulation, including physical cash and reserves.

Hyperinflation

An extremely high and typically accelerating inflation rate, often exceeding 50% per month.

Federal Funds Rate

The interest rate at which banks lend reserves to other depository institutions overnight.

Barter System

A system of exchange in which goods and services are traded directly for other goods and services without using money.

Fiat Money

Currency that has value because a government maintains it and people have faith in its value, rather than being backed by a physical commodity.

Loan

A sum of money borrowed that is expected to be paid back with interest.

Bond

A fixed income instrument that represents a loan made by an investor to a borrower.

Commodity Money

Money that has intrinsic value, such as gold or silver.

Commercial Bank

A financial institution that offers services such as accepting deposits and providing loans.

Thrift Institutions

Financial institutions that primarily accept savings deposits and make loans, including savings and loans associations and credit unions.

Shoe-leather Costs

Economic costs associated with increased transactions and reduced money holdings due to inflation.

Inflation Rate

The percentage increase in the general price level of goods and services in an economy over a period of time.

Multiplier Effect

The proportional amount of increase in final income that results from an injection of spending.

Equation of Exchange

An economic equation that represents the relationship between money supply, velocity, price level, and output (M x V = P x Y).

What are demand shifters?

Factors that cause the demand curve to shift, either to the right (increase in demand) or left (decrease in demand), including consumer preferences, income levels, prices of related goods, and expectations.

What are supply shifters?

Factors that cause the supply curve to shift, either to the right (increase in supply) or left (decrease in supply), including production costs, technology advancements, number of suppliers, and expectations about future prices.

Functions of Money

Money serves as a medium of exchange, unit of account, and store of value.

Federal Reserve System Structure

The Federal Reserve System consists of a board of governors and various regional banks that implement monetary policy.

Monetary Policy Tools

The Federal Reserve uses several tools such as required reserve ratios, discount rate, open-market operations, and extraordinary crisis measures to regulate the economy.

Creating Money in Banks

Banks create money by making loans to borrowers, thus increasing deposits in the banking system.

Multiplier Effect

The multiplier effect describes how an initial change in spending (like new loans) leads to a greater overall increase in the money supply.

Opportunity Cost of Holding Money

The opportunity cost of holding money refers to the potential earnings lost by not investing that money elsewhere.

Real Interest Rate

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate.

Quantity Theory of Money (QTM)

The Quantity Theory of Money suggests that a change in the quantity of money results in an equal proportional change in the price level.

Shoe-leather Costs

Shoe-leather costs refer to the increased cost of transactions caused by inflation, where people reduce their cash holdings and make more frequent trips to the bank.

Velocity of Circulation

Velocity of circulation measures how quickly money is exchanged within an economy, calculated using the equation M x V = P x Y.

Real GDP Formula

Real GDP = Nominal GDP / (1 + Inflation Rate) to adjust for inflation.

Aggregate Demand Formula

Aggregate Demand (AD) = C + I + G + (X - M), where C = consumption, I = investment, G = government spending, X = exports, M = imports.

Marginal Propensity to Consume (MPC) Formula

MPC = Change in Consumption / Change in Income.

Marginal Propensity to Save (MPS) Formula

MPS = Change in Savings / Change in Income.

Multiplier Effect Formula

Multiplier = 1 / (1 - MPC).

Induced Expenditure

Induced Expenditure = C - M

Net Investment

Net Investment = Gross Investment - Depreciation

Value of Money

Value of Money = 1 / P

Quantity Theory of Money (QTM)

P = (M × V) / Y

Aggregate Expenditure

Aggregate Expenditure = I + G + X

Equation of Exchange

An economic equation stating that the quantity of money multiplied by its velocity equals the price level multiplied by real GDP (M x V = P x Y).

Price Level (P) Formula

P = (M x V) / Y, showing that the price level is influenced by the quantity of money and velocity of circulation relative to real GDP.

Velocity of Circulation (V) Definition

Velocity of circulation measures how frequently a unit of currency is used to purchase final goods and services within a given time period.

Real GDP (Y) Definition

Real GDP is the total economic output adjusted for inflation, representing the value of goods and services produced.

Effects of Increasing Money Supply on Price Level

If the quantity of money (M) increases, the price level (P) must also increase, provided that velocity (V) and real GDP (Y) remain constant.

Multiplier Effect in Money Circulation

The concept that the same dollar can be spent multiple times in different transactions, indicating how money filters through the economy.

Velocity of Circulation Formula

V = (P x Y) / M, showing how velocity is calculated using the price level, real GDP, and the quantity