AP Macroeconomics: Unit 4 - The Financial Sector & Money

Liquidity

The ease with which an asset can be converted into cash without significant loss of value.

Interest Rate

The price of borrowing money or the return on lending money.

Opportunity Cost

The interest you could have earned if you had purchased an interest-bearing asset instead of holding cash.

Stocks

Ownership shares in a corporation.

Bonds

A loan (IOU) represented by a certificate.

Risk

The potential for loss or gain, where stocks carry higher risk than bonds.

Inverse Relationship

A situation where bond prices decrease as interest rates increase.

Medium of Exchange

An asset used to buy goods/services, eliminating the need for barter.

Unit of Account

A measurement of value that allows comparison of worth across different goods.

Store of Value

An asset that retains purchasing power over time.

Commodity Money

Money that has intrinsic value, like gold coins.

Fiat Money

Money that has no intrinsic value, serving as currency by government decree.

M1

The measurement of the money supply that includes the most liquid forms of money.

M2

A broader measure of the money supply that includes M1 plus near-monies.

Fractional Reserve System

A banking system in which banks hold a fraction of deposits as reserves.

Required Reserves

The specific percentage of demand deposits that banks must keep in reserve.

Excess Reserves

Actual reserves minus required reserves; the amount banks can loan out.

Money Multiplier

The factor by which an increase in reserves will increase the money supply.

Money Demand

The desired holding of cash and cash-equivalent balances.

Money Supply

The total amount of money available in an economy at a specific time.

Nominal Interest Rate

The interest rate before adjustment for inflation, depicted on the Money Market graph.

Open Market Operations

The buying and selling of government securities by the Federal Reserve.

Equilibrium

The point where supply and demand for money meet, determining the nominal interest rate.

Reserve Requirement

The percentage of deposits that banks are required to keep in reserve.

Discount Rate

The interest rate charged by the Federal Reserve to banks for short-term loans.

Common Pitfall

Frequent mistakes or misconceptions that students may have about financial concepts.

Real vs. Nominal Rates

The difference between the interest rate adjusted for inflation (real) and the stated interest rate (nominal).