AP®︎ Macroeconomics: Unit 4 Flashcards

The gain or loss on an investment over a specific period.

The chance an investment's actual return will differ from its expected return.

The most liquid forms of money; cash is physical currency, deposits are checking-account funds.

An interest-bearing asset representing a loan to a government or business.

An equity asset that represents partial ownership in a corporation.

Previously issued bond prices and market interest rates move in opposite directions.

A bond already sold once that can later be resold to another buyer.

Nominal rate = real rate + expected inflation; real rate = nominal rate - actual inflation.

The inflation rate lenders and borrowers anticipate when setting a nominal interest rate.

The stated rate is unadjusted for inflation, while the inflation-adjusted rate shows actual borrowing cost.

Any asset accepted as payment for goods, services, or debts.

Currency with value by government acceptance, not from a nonmonetary use.

An item used as money that also has an alternative nonmonetary use.

Medium of exchange, unit of account, and store of value.

Something widely accepted for buying and selling goods and services.

A standard measure that allows prices and values to be compared.

Something that keeps purchasing power over time if inflation is low.

Currency, coins, checkable deposits, and traveler's checks; the most liquid money measure.

M1 plus savings deposits, small time deposits, and retail money market funds.

A short-term loan used for purchases, not an asset counted as money.

The ease with which an asset can be converted into cash quickly.

A system where banks keep only part of deposits as reserves and lend the rest.

The minimum amount of deposits a bank must keep and not loan out.

Reserves held above the required minimum that banks can use to make new loans.

Funds in checkable bank accounts that can be withdrawn on demand.

Multiply initial excess reserves by the money multiplier to find the greatest possible increase.

Multiply the initial change by the money multiplier to find each systemwide maximum.

Banks expand the money supply by lending excess reserves, which become new deposits in other banks.

Banks may hold excess reserves and the public may hold currency instead of redepositing it.

A record of a bank’s assets and liabilities that must always balance.

The market where money demand and money supply determine the nominal interest rate.

The quantity of money people want to hold at different nominal interest rates.

The stated interest rate, equal to the real interest rate plus expected inflation.

As the nominal interest rate rises, the quantity of money demanded falls, and vice versa.

A money supply graph showing the quantity of money is unchanged at all nominal interest rates.

Nominal interest rate is on the vertical axis and quantity of money on the horizontal axis.

The market clears at the nominal interest rate where money demanded equals money supplied.

Money shortages raise nominal interest rates, while surpluses lower them toward equilibrium.

Price level, real GDP, and transaction costs shift the quantity of money people want to hold.

Central bank actions shift money supply right to lower rates or left to raise rates.

The interest income forgone by holding wealth as money instead of interest-bearing assets.

The total quantity of money in the economy, commonly measured by M1 and M2; in the money market it is set by the central bank and treated as independent of the nominal interest rate.

Central bank actions that change interest rates and money conditions to influence aggregate demand.

Interest rate the central bank charges commercial banks for short-term loans.

Administered rate the central bank pays banks on reserve balances they hold.

Limited reserves rely on reserve scarcity and money supply changes; ample reserves rely on administered interest rates.

In the reserve market, reserve supply changes shift the equilibrium federal funds rate.

Monetary policy shifts aggregate demand, changing real output and the price level in the short run.

It changes nominal interest rates, aggregate demand, real output, and the price level.

Delays occur because policymakers must recognize problems and the economy adjusts slowly afterward.

Central bank bond purchases raise reserves and the monetary base, while sales reduce both.

The target overnight interbank lending rate used to conduct monetary policy in the United States.

The percentage or fraction of deposits banks must hold as reserves rather than lend out.

The ratio showing the maximum expansion of deposits and the money supply from a change in reserves, equal in the simple case to 1 divided by the required reserve ratio.

Central bank actions used in a recessionary gap to increase money conditions and lower interest rates, raising spending, output, employment, and shifting aggregate demand right.

Central bank actions used in an inflationary gap to tighten money conditions and raise interest rates, reducing spending and shifting aggregate demand left to ease inflationary pressure.

Currency in circulation plus bank reserves held by banks or at the central bank.

The market where savers supply funds and borrowers demand funds, determining the real interest rate.

The amount borrowers want to borrow at each real interest rate, with an inverse relationship.

The amount savers and lenders provide at each real interest rate, with a positive relationship.

The point where quantity of funds demanded equals quantity supplied at the market real interest rate.

Below equilibrium, quantity demanded exceeds quantity supplied; above equilibrium, quantity supplied exceeds quantity demanded.

Demand right raises real interest rates and quantity; demand left lowers real interest rates and quantity.

Supply right lowers real interest rates and raises quantity; supply left raises real interest rates and lowers quantity.

The sum of private and public saving; in open economies, investment equals saving plus net capital inflow.

Government borrowing, investment incentives, and saving behavior shift demand or supply of loanable funds.