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AP ECON Unit IV

Vocabulary from Unit IV - Macro

TermsDefinition
Budget Balance The difference between tax revenue and government spending when tax revenue exceeds government spending.
National Savings The sum of private savings and the budget balance, is the total amount of savings generated within the economy.
Capital Inflow The net inflow of funds into a country.
Liability A requirement to pay money in the future.
Transaction Costs The expenses of negotiating and executing a deal.
Diversification Investing in several different assets so that the possible losses are independent events.
Liquid/Illiquid An asset is liquid if it can be quickly converted into cash without much loss of value while an asset is illiquid if it cannot be quickly converted into cash without much loss of value.
Default When a borrower fails to make payments as specified by the loan or bond contract.
Loan-backed Security An asset created by pooling individual loans and selling shares in that pool.
Financial Intermediary An institution that transforms the funds it gathers from many individuals into financial assets.
Mutual Fund A financial intermediary that creates a stock portfolio and then resells shares of this portfolio to individual investors.
Pension Fund A type of mutual fund that holds assets in order to provide retirement income to its members.
Checkable Bank Deposit Bank accounts on which people can write checks.
Money Supply The total value of financial assets in the economy that are considered money.
Store of Value A means of holding purchasing power over time.
Unit of Account A measure used to set prices and make economic calculations.
Near-Money Financial assets that can't be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits.
Present Value The value of $1.00 realized one year from now is equal to $1/(1+r); the amount of money you must lend out today in order to have $1.00 in one year. It is the value to you today of $1.00 realized one year from now.
Net Present Value The present value of current and future benefits minus the present and future costs.
Bank Reserves The currency banks hold in their vaults plus their deposits at the Federal Reserve.
T-Account A tool for analyzing a business's financial position by showing, in a single table, the business's assets (on the left) and liabilities (on the right).
Required Reserve Ratio The smallest fraction of deposits that the Federal Reserve allows banks to hold.
Bank Run A phenomenon in which many of a bank's depositors try to withdraw their funds due to fears of a bank failure.
Discount Window An arrangement in which the Federal Reserve stands ready to send money to banks.
Monetary Base The sum of currency in circulation and bank reserves.
Central Bank An institution that oversees and regulates the banking system and controls the monetary base.
Leverage When a financial institution finances its investments with borrowed funds.
Vicious Cycle of Deleveraging when asset sales to cover losses produces negative balance sheet effects on other firms and force creditors to call in their loans, forcing sales of more assets and causing further declines in asset prices.
Subprime Lending Lending to home buyers who don't meet the usual criteria for being able to afford their payments.
Securitization A pool of loans is assembled and shares of that pool are sold to investors.
Federal Funds Market Allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves.
Discount Rate The interest rate the Federal Reserve charges on loans to banks.
Open Market Operation A purchase or sale of government debt by the Federal Reserve.
Money Demand Curve Shows the relationship between the quantity of money demanded and the interest rate.
Liquidity Preference Model of the Interest Rate According to this model, the interest rate is determined by the supply and demand for money.
Money Supply Curve Shows the quantity of money supplied varies with the interest rate.
Rate of Return The profit earned on a project expressed as a percentage of its cost.
Crowding Out When the government deficit drives up the interest rate and leads to reduced investment spending.
Fisher Effect According to this, an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged.
Interest Rate The price, calculated as a percentage of the amount borrowed, charged by lenders to borrowers for the use of their savings for one year.
Savings - Investment Spending Identity Savings and Investment Spending are always equal for the economy as a whole.
Created by: Sflames6
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