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