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Money & Banking

AP Macroeconomics Unit 4 Vocabulary

TermDefinition
Bonds A certificate of debt issued by a company or a government to an investor
Contractionary Monetary Policy Fed reduces the supply of money
Crowding-Out Effect The rise in interest rates and the resulting decrease in investment spending that is caused by increased government borrowing
Demand Deposit A deposit in a commercial bank against which checks may be written (aka Checkable Deposit)
Discount Rate The interest rate that the Fed charges on loans made to commercial banks
Excess Reserves The amount by which a bank's actual reserves exceed its required reserves
Federal Funds Rate (FFR) The interest rate banks charge one another on overnight loans made out of their excess reserves. The FFR is targeted by the Fed through open-market operations.
Fractional Reserve Banking A banking system in which banks hold only a fraction of deposits as required reserves and can lend some of the money deposited by their customers to other borrowers.
Liquidity The ease with which an asset can be converted - quickly - into cash with little or no loss of purchasing power.
Loanable Funds Market The market in which the demand for private investment and the supply of household savings intersect to determine the equilibrium interest rate.
M1 Currency and checkable deposits
M2 M1 + savings deposits, money-market deposits, mutual funds, and small-time deposits
M3 M1 + M2 + large-time deposits
Monetary Policy The Fed's manipulation of the supply of money aimed at raising or lowering interest rates to stimulate or contract the level of aggregate demand
Money The sum of the transaction demand and the asset demand for money. Inversely related to the interest rate
Money Multiplier 1/ RRR
Quantity Theory of Money Equation MV=PQ
Stock A certificate that represents a claim to, or share of, the ownership of a firm
Fiat Money Money with no intrinsic value, it is backed by the public's trust in the government
Transaction Demand The amount of money held in order to make transactions
Asset Demand The amount of money demanded as an asset
Reserve Ratio The fraction of the bank's total deposits that are kept on reserve
Open Market Operations A tool of monetary policy that involves the Fed buying and selling bonds to and from commercial banks and the general public
Created by: Mrs.Hidalgo