Ap Econ Mods 22-29

Front 1

interest rate

Back 1

price charged by lenders to borrowers for the use of their savings for one year

Front 2

savings-investment spending identity

Back 2

savings and investment spending are always equal for the economy as a whole (savings = investment spending) with no gov intervention

Front 3

budget surplus

Back 3

equivalent to savings by the government

Front 4

budget deficit

Back 4

equivalent to opposite of savings

Front 5

budget balance

Back 5

difference between tax revenue and gov spending (can be positive or negative)

Front 6

national savings

Back 6

sum of private savings and budget balance (as compared to private savings being disposable income minus consumption)

Front 7

capital inflow

Back 7

net inflow of funds into a country

Front 8

Balanced Budget (BB)

Back 8

BB = Tax Revenue - G spend - G transfers

Front 9

If BB is positive, then...

Back 9

investment will increase (S + BB = I)

Front 10

If BB is negative, then...

Back 10

investment will decrease (S + BB = I)

Front 11

Capital Inflow (CI)

Back 11

CI = total inflow of foreign funds - total outflow of domestic funds

Front 12

If CI is positive, then...

Back 12

investment will increase (S + BB + CI = I)

Front 13

If CI is negative, then...

Back 13

investment will decrease (S + BB + CI = I)

Front 14

Financial Asset

Back 14

a paper claim that entitles the buyer to future income from the seller (usually interest)

Front 15

3 tasks of financial system

Back 15

1. reducing transaction costs

2. reducing risk: concept of diversification

3. providing liquidity: how easily an asset can be turned into cash

Front 16

physical asset

Back 16

claim on a tangible object

Front 17

liability

Back 17

requirement to pay money in the future

Front 18

important kinds of financial assets

Back 18

loans, stocks, bonds, bank deposits

Front 19

financial intermediary

Back 19

institution that transforms funds gathered from many individuals into financial assets

Front 20

money

Back 20

any asset that can be easily used to purchase goods and services

Front 21

currency in circulation

Back 21

actual cash in the hands of the public

Front 22

checkable bank deposits

Back 22

bank accounts on which people can write checks

Front 23

money supply

Back 23

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

Front 24

roles of money

Back 24

1. medium of exchange

2. store of value: a means of holding purchasing power over time

3. unit of account: commonly accepted measure individuals use to set prices and make economic calculations

Front 25

types of money

Back 25

1. barter system: double coincidence of wants

2. commodity money: something used as money that has intrinsic value (silver/gold)

3. commodity-backed money: no intrinsic value but is guaranteed by a promise that it can be converted into a valuable good like gold/silver (gold standard)

4. fiat money: money whose value is derived entirely from its official status as means of exchange by the gov

Front 26

money aggregates

Back 26

overall measures of the money supply

Front 27

M1

Back 27

currency/coin in circulation + checking deposits + traveler's checks

(this money is most liquid)

Front 28

M2

Back 28

M1 + savings accounts + short-term CD's + money market accounts

("near monies", less liquid)

Front 29

Time value of money equation

Back 29

Future value = present value (1+r)^t

Front 30

bank reserves

Back 30

currency in bank vaults and deposits held at the Federal Reserve

Front 31

T-account

Back 31

tool for analyzing a business's financial position by showing in a table the business's assets (left) and liabilities (right)

Front 32

bank runs

Back 32

when people get scared and rush to the bank to withdrawal their money

Front 33

required reserve ratio

Back 33

smallest fraction of bank deposits that a bank must hold (10%)

Front 34

Bank Regulations

Back 34

1. capital requirements: banks must hold more assets than the value of their deposits

2. reserve requirements

3. discount window: The federal reserve can make short term loans to banks when they are short of their reserve requirements

4. deposit insurance: FDIC (Federal Deposit Insurance Corporation) guarantee that depositors will be paid even if the bank cant come up with the funds

Front 35

Federal Reserve

Back 35

central bank

Front 36

central bank

Back 36

institution that oversees and regulates the banking system, controls the monetary base

Front 37

Two parts of the federal reserve

Back 37

Board of Governors and the 12 regional Federal Reserve Banks

Front 38

two categories of banks

Back 38

1. commercial banks: depository banks that accepted deposits and were covered by deposit insurance

2. investment banks: engaged in creating and trading financial assets such as stocks and corporate bonds but were not covered by deposit insurance

Front 39

Functions of the Federal Reserve System

Back 39

1. Financial Services: "Banker's Bank"

2. Supervise and Regulate Banking Institutions

3. Maintain Stability of the Financial System

4. Conducting Monetary Policy

Front 40

3 main policy tools of the Fed

Back 40

1. The Reserve Requirement: Banks can borrow money from other banks via the federal funds market. They will pay an interest rate called the federal funds rate.

2. The Discount Rate: Banks can also borrow from the Federal Reserve from the discount window at a rate called the discount rate (normally not used)

3. Open Market Operations

Front 41

Open Market Operations

Back 41

The buying and selling of US Treasury Bills (T-Bills, Bonds) usually done with a transaction with commercial banks. The Fed buys T-Bills, increasing monetary base, kick starting the multiplier effect and increasing the money supply. This leads to greater spending, AD, and real GDP. Opposite true when Fed sells T-Bills.

Front 42

opportunity cost of holding money

Back 42

the interest you would have earned on it had it been in a bank

Front 43

rates on financial assets tend to...

Back 43

move together

Front 44

Money Demand Curve

Back 44

Opportunity cost of holding money in the short term is the short-term interest rate. In the short term, nominal interest rate = real interest rate.

Front 45

Shifts of the Money Demand Curve

Back 45

1. Changes in the APL: higher prices will increase the demand for $ (they are actually proportional)

2. Changes in Real GDP: if real GDP increases, shifts to the right.

3. Changes in Technology: Increase in tech makes it easier to get money, so curve shifts left since demand decreases.

4. Changes in Institutions: Regulations that make it more attractive to keep money in banks will reduce demand for money.

Front 46

The Fed focuses it's tools of monetary policy to achieve...

Back 46

a target level for the federal funds rate

Front 47

Equilibrium Interest Rate

Back 47

the Money Supply is going to be set by the Fed and is independent of the interest rate so it will be vertical

Front 48

money supply curve (liquidity preference model)

Back 48

money demand curve slopes downward because as the value of money decreases, consumers are forced to carry more money to make purchases because goods and services cost more money

Front 49

Market for Loanable Funds

Back 49

where those who want to lend money and those who want to borrow money are brought together. The price is the real interest rate (r). This market is for long run decisions.

Front 50

Real IR =

Back 50

Real IR = Nominal IR - expected inflation

Front 51

Demand for loanable funds comes from...

Back 51

borrowers

Front 52

Supply for loanable funds comes from...

Back 52

savers

Front 53

Shifts in demand LF

Back 53

1. Changes in perceived business opportunities

2. Changes in the government's borrowing

Front 54

Shifts in supply LF

Back 54

1. Changes in private savings behavior

2. Changes in capital inflows

Front 55

Fisher effect

Back 55

the expected real interest rate is unaffected by the change in expected future inflation

Front 56

Difference between the 2 supply curves in the 2 different models

Back 56

The Fed determines the money supply in the money market but they can't control whether it is made available for loans in the loanable funds market. People make those decisions based on the IR.