AP Macro
Medium of exchange
Any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.
Example of investment spending
GM builds a new plant to manufacture automobiles
As an investor, you may chose to purchase a bond or a share of stock. If you choose to purchase the bond, you are likely to receive a _____ return in exchange for a _____ level of risk.
Lower; lower
The Fed reports two main monetary aggregates. They are
M1 and M2
If you transfer $1000 from your savings account to your checking account
M1 increases by $1000 but M2 doesn't change
Loan
a liability for the borrower and an asset for the lender
Unit of account
a means for comparing the values of goods and services
Store of value
a means of holding purchasing power over time
Commodity-backed money
a medium of exchange with no intrinsic value
Stock
a share in the ownership of a company held by a shareholder
Bond
an IOU that pays interest
Money
any asset that can be easily used to purchase goods and services
A bank run can "break a bank" because
banks cannot quickly convert illiquid loans into liquid assets without facing a large financial loss.
One way to reduce financial risk
buy a variety of assets, both financial and physical
The main role of financial systems is to
channel funds from savers into investments
From the standpoint of economic growth, banks are important to
channel savings into investment
An asset most people would consider money
checking account balance
The narrowest definition of money excludes
currency in the vault at the bank.
Physical capital is purchased through investment spending, which in turn is financed by
domestic and foreign savings
Currency is circulation + bank reserves
form the monetary base
Reserve ratio
fraction of deposits that the bank is required to hold
Private savings is equal to
income - taxes + transfers - consumption
The money multiplier and the required reserve ratio are
inversely related
Total savings
investment spending
When a corporation borrows money from lenders in exchange for a fixed share of the firm's assets and potential profits, the corporation is
issuing stocks
To help increase investment spending, the government can
lower taxes on the returns from savings, so that total savings increase and the interest rate falls
If banks were required to keep 100% of deposits in reserves, they could
make no loans
The double coincidence of wants problem can be solved by
money
The amount of money you would be willing to lend today, in exchange for $1 paid to you one year from now is known as the
present value of $1
National saving
private saving - budget balance
Investment spending
private savings - deficit
The savings-investment spending identity says that
savings and investment spending are always equal for the economy as a whole
budget balance
taxes - government spending
Transaction costs
the expenses of negotiating and executing a deal
Bank reserves
the fraction of deposits kept in the form of very liquid assets
What is the initial effect of an individual making a $10,000 cash deposit in a bank?
the money supply would not be effected by the deposit
Wealth
the value of all accumulated savings of a household
Suppose you find a $50 bill that you put in a coat pocket last winter. If you deposit it in your checking account
there is no change in M1 or M2
When countries replaced gold and silver coins with paper money exchangeable for certain amounts of precious metals, the monetary system evolved from
using commodity money to using commodity-backed money
