AP Macro Unit 4 Vocab

Financial assets - Items of value that can be traded in financial markets, including stocks, bonds, or bank deposits, that represent claims to future income or value

Fiat money - Currency that has no intrinsic value and is not backed by a physical commodity, but is declared legal tender by the government, such as paper money

Commodity money - Money that has intrinsic value, meaning it is made of a commodity such as gold or silver, which has value in itself and is used as a medium of exchange

Financial intermediary - An institution that connects borrowers with lenders, such as banks, insurance companies, or mutual funds, which facilitates the flow of funds in the economy

Fisher effect - The relationship between nominal interest rates, real interest rates, and inflation, which states that an increase in expected inflation leads to an equal increase in the nominal interest rate, leaving the real interest rate unchanged

Monetary base - The total supply of a country’s currency, including coins, paper money, and the reserves held by commercial banks at the central bank, also known as "high-powered money"

Money - A medium of exchange that is widely accepted for the purchase of goods and services, and also serves as a unit of account, store of value, and standard of deferred payment

Balance sheet - A financial statement that shows a company’s assets, liabilities, and equity at a given point in time, providing a snapshot of its financial health

Bank deposit - Funds placed in a bank account by individuals or businesses, which the bank uses to lend to others, and may pay interest to the depositor

Bank reserves - The portion of deposits that a bank is required to hold in reserve and not lend out, either as cash in its vaults or as deposits at the central bank

Liability - A financial obligation or debt that a person or organization owes, such as loans, bonds, or other borrowings

Bond - A debt security where an issuer borrows funds from investors and agrees to pay back the principal along with interest at a specified date in the future

Capital inflow - The movement of capital into a country or economy from foreign investors, often in the form of investments, loans, or other financial transactions

Central bank - The institution responsible for managing a country’s monetary policy, regulating the money supply, and overseeing the banking system, such as the Federal Reserve in the U.S.

Demand deposits - Bank deposits that can be withdrawn by the account holder at any time without advance notice, often referred to as checking accounts

Excess reserves - The amount of reserves that a bank holds above the required minimum, which can be used to lend to borrowers or to meet other liquidity needs

Federal funds market - The market where depository institutions (such as banks) lend reserves to each other overnight on an unsecured basis to meet reserve requirements

Federal funds rate - The interest rate at which depository institutions lend reserves to one another overnight in the federal funds market, set by the Federal Reserve and used as a benchmark for other interest rates

Fractional reserve system - A banking system in which banks are required to keep only a fraction of deposits as reserves and are free to lend out the remainder, which creates money in the economy