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AP Macro Unit 4
| Term | Definition |
|---|---|
| Medium of Exchange | accepted as payment for goods and services |
| Store of Value | can be saved; people use money to save for something |
| Unit of Accounting | aka standard of value; can be used to compare the value of goods and services |
| M1 | includes currency in circulation, checkable deposits and savings deposits (most used measurement of the money supply); checking accounts are the biggest part of M1 |
| M2 | M1 + non-savings time deposits and other “less liquid” assets that can be converted into cash (certificates of deposit) |
| Demand Deposits | aka transaction deposits; checking and simple savings accounts that are counted in M1 |
| Time Deposits | things like certificates of deposit (CDs) that can’t be immediately converted into cash |
| Monetary Base | money in circulation + bank reserves kept with the FED |
| Liquidity | the degree/ease with which an asset can be converted into cash. The easier an asset can be converted to cash the more liquid the asset |
| Near Money | paper assets/investments/accounts (such as stocks and bonds) that can be converted into cash |
| Assets | items of value owned by banks (loans that banks make to borrowers, investments, and reserves) |
| Liabilities | items owed by a bank (financial responsibilities) Examples: loans the bank has taken out and deposits held by the bank. (Often when banks invest they borrow money to do this) |
| Fractional Reserve System | system in which banks only need to keep a certain percentage of their deposits in reserve; allows the money supply to grow when people deposit money in their checking or savings account |
| Net Worth | assets - liabilities |
| Required Reserves | legally required reserves (money the bank cannot invest) which is currently use only in countries with limited reserves |
| Excessive Reserves | the money available for banks to lend and invest; US Banks are holding increasing amounts of excess reserves than they did previously |
| Federal Deposit Insurance Corporation (FDIC) | insures deposits in National Commercial Banks (due to the financial crisis of 2008 the amount insured was raised to $250,000) |
| Federal Saving and Loan Insurance Corporation (FSLIC) | insures deposits at Savings and Loan Associations |
| Reserve Requirement (Reserve Ratio) | percentage of deposits banks must keep “on hand”; because the US has ample reserves does not currently have a reserve requirement; most likely in the context of countries that have limited reserves |
| Nominal Interest Rates | expected rate of inflation + real interest rate (the real rate of return that lenders want to receive) |
| Real Interest Rates | nominal interest rate - the actual rate of inflation (this is also the rate of return a lender wants to earn beyond inflation) |
| Prime Rate | the interest rate banks charge their best customers; most consumer interest rates (mortgages, car loans, credit cards) are based on the prime rate; prime rate + ________ |
| Federal Funds Rate | aka overnight rate; bank to bank interest rate for 24 hour loans; also called the policy rate |
| Discount Rate | interest rate the FED charges banks for longer term loans; this is controlled by the FED |
| The FED | the federal reserve system; central bank of the US; privately owned by member banks but its leaders are appointed by the federal government |
| Federal Open Market Committee | responsible for monetary policy; the division of the federal reserve that sets monetary policy by managing open market operations |
| Regional Depositories | maintains currency, check clearing, banks for member banks |
| Member Banks | All federally charged banks (some large state chartered banks are also included); these are the banks that own the FED and they pay for its existence |
| Monetary Policy | policies used by Central Banks (in the US it's the FED) to control interest rates |
| Administrative Rates | interest rates under the control of the FED |
| Reserve Interest Rate | the interest rates the FED pays on reserves (savings rate for banks) |
| Open Market Operations | refers to central banks either buying or selling government securities, these transactions are done with banks (this is no longer used by the US to affect interest rates) |
| Policy Rate | this is an overnight bank to bank interest rate; in the US this is called the Federal Funds rates; in economies with limited reserves this is the interest rate that is most affected by changes in the money supply |
| Monetarism | belief that the best way to gradually grow the economy in the long-run is through slow steady growth in the money supply |
| Velocity | speed at which money circulates through the economy; it measures the number of times each dollar is used in transactions in a given year; monetarists believe that velocity is constant in the long-run |
| Equation of Exchange | M(money supply) x V(velocity) = nominal GDP |
| Quantity Theory of Money | the monetarist belief that in the long run velocity of money is constant (is the idea that as the money supply increases the value of money goes down) |
| Crowding Out Effect | government deficits increase, government borrowing increases, this increases the demand for loanable funds which raises interest rates in the long run (bad for long run economic growth) |
| Crowding In Effect | lower deficits reduce government borrowing and the demand for loanable funds, lowers real interest rates, good for the long run health of the economy |
| Money Multiplier Effect | when an increase or decrease initially occurs in the money supply, the overall effect of that change (on the money supply) will be greater than the immediate/initial change in the money supply |
| Money Multiplier | 1/reserve requirement |
| "Holding Cash"/"Held Cash" | money is deposited or taken out from a bank; this is usually done by individuals when they deposit “held cash” or they withdraw money to “hold as cash” |
| Demand Deposit Multiplier | the multiplier is the same (1/R) and that number is multiplied by the amount of the original change in demand deposits (money deposited in the bank or money that is withdrawn from a checking account) |
| Barter | trading of goods and service for other goods and services |
| Problem of Double Coincidence | in order for transactions to occur every time one person wants a particular good or service there has to be someone with that good/service who wants what the original person has to trade (might work in a small economy but not in a large economy) |
| Commodity Money | money that has other uses other than its use as money (ex. spices during the middle ages or cigarettes in prison) |
| Fiat Money | money that has no other use other than its use as money |
| Monetary Standards | basis of a nation’s money determines the value of a nation’s money |
| Gold Standard | money’s value is stated in terms of a certain amount of gold (money can also be exchanged for gold) |
| Inconvertible Fiat Standard | money cannot be exchanges for gold/silver (value in this type of monetary standard is determined by exchange rates |
| Exchange Rates | how much of one currency can be bought for each unit of another currency |
| Fixed Exchange Rates | exchanges rates for a country;s money are set by the country’s government (usually their central bank) |
| Floating Exchange Rates | the exchange rate for a country’s money is determined on international exchange markets (forces of supply and demand for money) |
| Appreciation | refers to the value of a nation’s currency increasing |
| Depreciation | refers to the value of a nation’s currency decreasing |
| Loanable Funds Market | Quantity of Loanable Funds and Real Interest Rates; Supply of Loanable funds is typical upward sloping line. |
| Money Market | illustrates the Quantity of Money and Nominal Interest rates; Money Supply is illustrated as a vertical line |
| Quantitative Easing | refers to increasing the money supply by the FED purchasing treasury bonds and other securities |
Created by:
rcooke
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