Chapter 5 AP Macroeconomics Vocabulary

Interest Rate

Is the price calculated as a percentage of the amount borrowed, charged by lenders to borrowers for the use of their savings for one year

Budget Surplus

Is the difference between tax revenue and government spending when tax revenue exceeds government spending

Budget Deficit

Is the difference between tax revenue and government spending when government spending exceeds tax revenue

Budget Balance

Is the difference between tax revenue and government spending

National Savings

The sum of private savings and the budget balance
• Is the total amount of savings generated within the economy

Capital Inflow

Is equal to the total inflow of foreign funds minus the total outflow of domestic funds to other countries

Financial Risk

Is uncertainty about future outcomes that involve financial losses and gains

Liability

Is a requirement to pay money in the future

Physical Asset

Is a claim on a tangible object that gives the owner the right to dispose of the object as he or she wishes

Commercial Bank

Banks that mainly make business loans, as opposed to home loans

Bank Run

Is a phenomenon in which many of a bank's depositors try to withdraw their funds due to fears of a bank failure

Liquid

If it can be quickly converted into cash without much loss of value

Short

Term Interest Rate

Financial Asset

Is a paper claim that entitles the buyer to future income from the seller

Wealth

A household's wealth is the value of its accumulated savings

Commodity Money

Is a good used as a medium of exchange that has intrinsic value in other uses

Unit of Account

Is a measure used to set prices and make economic calculations

Store of Value

Is a means of holding purchasing power over time

Net Present Value

Is the present value of current and future benefits minus the present value of current and future costs

Reserved Ratio

Is the fraction of bank deposits that a bank holds as reserves

Commodity

backed Money

Excess Reserves

Are a bank's reserves over and above its required reserves

Medium of Exchange

Is an asset that individuals acquire for the purpose of trading for goods and services rather than for their own consumption

Reserve Requirements

Are rules set by the Federal Reserve that determine the required reserve ratio for banks

Investment Tax Credit

Is an amount that firms are allowed by law to deduct from their taxes based on their investment spending

Money Multiplier

Is 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

Federal Funds Rate

Is the interest rate that banks charge other banks for loans, as determined in the federal funds market

Discount Rate

Is the interest rate the Fed charges on loans to banks

Crowding Out

Occurs when a government deficit drives up the interest rate and leads to reduced investment spending

Rate of Return

Is the profit earned on the project expressed as a percentage of its cost

Open Market Operation

Is a purchase or sale of government debt (bond) by the Fed

Money Demand Curve (MD)

Shows the relationship between the quantity of money demanded and the interest rate

Money Supply Curve

Shows the relationship between the quantity of money supplied and the interest rate

Bank Deposit

Is a claim on a bank that obliges the bank to give the depositor his or her cash when demanded

Financial Intermediary

Is an institution that transforms the funds it gathers from many individuals into financial assets

Required Reserve Ratio

Is the smallest fraction of deposits that the Federal Reserve requires banks to hold

Loanable Funds Market

Is a hypothetical market that brings together those who want to lend money and those who want to borrow money

Long

Term Interest Rate

Bank

Is 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

Money Supply

Is the total value of financial assets in the economy that are considered money

Money

Is an asset that can easily be used to purchase goods and services

Fiat Money

Is a medium of exchange whose value derives entirely from its official status as a means of payment

Future Value

Is the amount to which it will grow as interest accumulates over a specified period of time

Present Value

The amount of money you must lend out today in order to have $1 in one year. It is the value to you today of $1 realized one year from now.
• $1/(1+r)

Monetary Base

Is the sum of currency in circulation and bank reserves

Investment Bank

Trades in financial assets and isn't covered by deposit insurance

Transaction Costs

Are the expenses of negotiating and executing a deal

Monetary Aggregate

Is an overall measure of the money supply

Loan

Is a lending agreement between an individual lender and an individual borrower

Illiquid

If an asset can't be quickly converted into cash without much loss of value