AP Macro Notes

• Relationship of risk and return:

  • More risk →higher potential return

  • Less risk → lower potential return

• Present value of money:

  • What money you will receive in the future is worth today

• Future value of money:

  • How much money you will have in the future after earning interest

• Dividends:

  • Money a company pays to its shareholders from its profits

• Capital gain:

  • Money you make when you sell an investment for more than you paid

• Capital loss:

  • Money you lose when you sell an investment for less than you paid

• Broker’s commission/fee:

  • Money charged by a broker for helping you buy or sell an investment

• Mutual fund:

  • A fund that combines money from many investors to buy different investments

• Diversification:

  • Spending your money among different investments to reduce risk

• P/E ratio:

  • A ratio that compares a company’s stock price to its earnings per share

• Risk premium:

  • The extra return an investor expects for taking more risk

• Treasury bill:

  • A short-term loan to the U.S. government that earns interest

• Treasury note:

  • A medium-term loan to the U.S. government that earns interest

• Treasury bond:

  • A long-term loan to the U.S. government that earns interest

• Savings bond:

  • A government investment that earns interest over time

• Certificate of Deposit (CD):

  • A bank account where you agree to leave your money for a set period in exchange for interest

• Principal:

  • The original amount of money invested or borrowed

• Maturity:

  • The date when an investment reaches the end of its set time period

• Early withdrawal penalty:

  • A fee charged for taking money out of an account before the agreed-upon time

• FDIC Insurance:

  • Protection for money deposited in an insured bank if the bank fails, up to certain limits

• Money Market Fund:

  • An investment fund that invests in short-term, relatively low-risk investments

• Money Market Account:

  • A bank account that earns interest and allows you to access you money

Retirement Accounts

• 401K:

  • A retirement savings account usually offered by an employer

• 403b:

  • A retirement savings account usually offered for schools or other nonprofit organizations

• IRA:

  • A retirement account where contributions may receive a tax benefit now, while withdrawals are generally taxed later

• Roth IRA:

  • A retirement account where you pay taxes on the money before contributing, so qualified withdrawals are generally tax-free later

Money Market Graph

• Money supply:

  • The amount of money available in the economy

• Money demand:

  • The amount of money people want to hold instead of spending or investing

• Nominal interest rate:

  • The stated interest rate on a loan or investment before considering inflation

• Quantity of money:

  • The amount of money available in the economy at a given time

• Money supply increase:

  • When the amount of money available in the economy increases

• Money supply decrease:

  • When the amount of money available in the economy decreases

Economic Systems

• Capitalism:

  • An economic system where individuals and businesses privately own resources and make most economic decisions

• Socialism:

  • An economic system where the government has a larger role in controlling resources and providing services

• Communism:

  • An economic system where the government controls most major resources and production

• Mixed economy:

  • An economy that combines private markets with government involvement

• Efficiency:

  • Using limited resources to produce the greatest possible amount of goods and services

• Equity:

  • Fairness in how resources, income, or opportunities are distributed