| Term | Definition |
|---|---|
| bond price | The market value of a bond at any given time, which fluctuates inversely with changes in interest rates. |
| bonds | Interest-bearing financial assets that represent a loan to a borrower, typically a government or corporation. |
| cash | Physical currency in the form of bills and coins, representing the most liquid form of money. |
| demand deposits | Bank deposits that can be withdrawn on demand without penalty, such as checking accounts. |
| financial assets | Claims on future income or assets that can be held as stores of value, including money, bonds, and stocks. |
| interest rates | The cost of borrowing money, influenced by monetary policy and affecting exchange rates through changes in currency demand. |
| liquidity | The ease with which a financial asset can be quickly converted into cash without significant loss of value. |
| opportunity cost | The value of the next best alternative that must be given up when making a choice. |
| previously issued bonds | Bonds that were sold in the past and are now trading in the secondary market at prices that may differ from their original issue price. |
| rate of return | The gain or loss on a financial asset, typically expressed as a percentage of the initial investment over a specific time period. |
| risk | The uncertainty or potential for loss associated with holding a financial asset. |
| stocks | Equity financial assets that represent ownership shares in a corporation. |
| Term | Definition |
|---|---|
| expected inflation | The anticipated rate of increase in the general price level that lenders and borrowers use when determining nominal interest rates. |
| expected real interest rate | The anticipated return on a loan adjusted for expected inflation, used by lenders and borrowers to establish nominal interest rates. |
| inflation | A sustained increase in the general price level of goods and services in an economy over time. |
| nominal interest rate | The stated interest rate on a loan or investment, not adjusted for inflation. |
| real interest rate | The interest rate adjusted for inflation, reflecting the true purchasing power gained or lost from lending or borrowing. |
| Term | Definition |
|---|---|
| bank reserves | Money held by banks that is not loaned out, including reserves required by the Federal Reserve and excess reserves. |
| currency in circulation | Physical money (coins and paper bills) that is in use by the public and businesses. |
| M1 | A monetary aggregate that includes the most liquid forms of money, such as currency in circulation and checking accounts. |
| M2 | A monetary aggregate that includes M1 plus less liquid assets such as savings accounts and money market accounts. |
| measures of money | Quantitative calculations used to determine the money supply, including monetary aggregates such as M1 and M2. |
| medium of exchange | A function of money that allows it to be used to purchase goods and services. |
| monetary aggregates | Different measures of the money supply, including M1 and M2, that categorize money based on liquidity. |
| monetary base | The total amount of money created by a central bank, consisting of currency in circulation and bank reserves. |
| money | Any asset that is accepted as a means of payment for goods and services. |
| money supply | The total amount of money available in an economy at a given time, including currency in circulation and deposits in financial institutions. |
| store of value | A function of money that allows it to be saved and used to purchase goods and services in the future. |
| unit of account | A function of money that provides a standard measure for comparing the value of different goods and services. |
| Term | Definition |
|---|---|
| balance sheets | Financial statements that show a bank's assets, liabilities, and equity at a specific point in time, used to analyze the effects of banking system changes. |
| bank reserves | Money held by banks that is not loaned out, including reserves required by the Federal Reserve and excess reserves. |
| banking system | The network of financial institutions, including commercial banks and central banks, that facilitate the creation and circulation of money in an economy. |
| depository institutions | Financial institutions such as commercial banks that accept deposits from the public and use those funds to make loans. |
| excess reserves | Reserves held by banks beyond the required minimum, which can be loaned out to expand the money supply. |
| fractional reserve banking | A banking system in which depository institutions hold only a fraction of their deposits in reserve and lend out the remainder. |
| monetary base | The total amount of money created by a central bank, consisting of currency in circulation and bank reserves. |
| money multiplier | The factor by which the money supply increases relative to an increase in the monetary base through the lending activities of commercial banks. |
| money supply | The total amount of money available in an economy at a given time, including currency in circulation and deposits in financial institutions. |
| money supply expansion | The process by which the banking system increases the total amount of money in circulation through lending based on excess reserves. |
| required reserve ratio | The percentage of deposits that commercial banks are required to hold in reserve rather than lend out, used as a monetary policy tool. |
| required reserves | The minimum amount of reserves that depository institutions are legally required to hold, determined by the required reserve ratio. |
| Term | Definition |
|---|---|
| central bank | A financial institution responsible for implementing monetary policy and managing a country's money supply and banking system. |
| demand for money | The quantity of money that individuals and businesses want to hold at different interest rates and price levels. |
| disequilibrium | A market condition in which the quantity supplied does not equal the quantity demanded, causing imbalances that create surpluses or shortages. |
| equilibrium | A market condition in which the quantity supplied equals the quantity demanded at a particular price, with no tendency for change. |
| equilibrium nominal interest rate | The interest rate at which the quantity of money demanded equals the quantity of money supplied in the money market. |
| market forces | The supply and demand pressures that drive prices toward equilibrium in response to surpluses and shortages. |
| monetary base | The total amount of money created by a central bank, consisting of currency in circulation and bank reserves. |
| monetary policy | Central bank actions that influence the money supply, interest rates, aggregate demand, real output, price level, and exchange rates. |
| money market | The market where money supply and money demand interact to determine the equilibrium nominal interest rate. |
| money supply | The total amount of money available in an economy at a given time, including currency in circulation and deposits in financial institutions. |
| nominal interest rate | The stated interest rate on a loan or investment, not adjusted for inflation. |
| price level | The average of all prices of goods and services produced in an economy, typically measured by price indices like the CPI. |
| quantity demanded of money | The amount of money that individuals and businesses wish to hold at a given nominal interest rate. |
| supply of money | The total quantity of money available in an economy, controlled by the central bank through monetary policy. |
| surpluses | A situation in the money market where the quantity of money supplied exceeds the quantity of money demanded at a given nominal interest rate. |
| Term | Definition |
|---|---|
| AD-AS model | An economic model that shows the relationship between aggregate demand and aggregate supply to illustrate macroeconomic equilibrium and the effects of policy changes. |
| adjustment lag | The time it takes for the economy to respond and adjust to a monetary policy action after it has been implemented. |
| aggregate demand | The total quantity of goods and services demanded across an entire economy at different price levels. |
| central bank | A financial institution responsible for implementing monetary policy and managing a country's money supply and banking system. |
| contractionary monetary policy | Central bank actions that decrease the money supply and raise interest rates to reduce inflation and cool down an overheating economy. |
| discount rate | The interest rate at which a central bank lends to commercial banks, used as a tool of monetary policy. |
| expansionary monetary policy | Central bank actions that increase the money supply and lower interest rates to stimulate economic growth and reduce unemployment. |
| federal funds rate | The interest rate at which commercial banks lend reserve balances to each other overnight, targeted by the Federal Reserve as its primary policy rate. |
| full employment | An economic condition where all available labor resources are being used efficiently and unemployment is at its natural rate. |
| inflationary output gap | A positive output gap occurring when actual real output exceeds the full-employment level of output, putting upward pressure on prices. |
| interest on reserves | The interest rate paid by a central bank to commercial banks on the reserves they hold, used as a monetary policy tool. |
| lags | Delays between the time a policy action is taken and when its effects are fully realized in the economy. |
| monetary base | The total amount of money created by a central bank, consisting of currency in circulation and bank reserves. |
| monetary policy | Central bank actions that influence the money supply, interest rates, aggregate demand, real output, price level, and exchange rates. |
| money market model | An economic model that shows the relationship between the money supply, money demand, and interest rates. |
| money multiplier | The factor by which the money supply increases relative to an increase in the monetary base through the lending activities of commercial banks. |
| nominal interest rate | The stated interest rate on a loan or investment, not adjusted for inflation. |
| open market operations | The buying and selling of government securities by a central bank to influence the money supply and monetary base. |
| policy rate | The target interest rate set by a central bank for overnight interbank lending to influence overall monetary conditions. |
| price level | The average of all prices of goods and services produced in an economy, typically measured by price indices like the CPI. |
| price stability | A macroeconomic goal in which the general price level of goods and services remains relatively constant over time. |
| real output | The total production of goods and services in an economy adjusted for inflation, measured in constant dollars. |
| recognition lag | The time it takes for policymakers to identify and recognize that a problem exists in the economy. |
| required reserve ratio | The percentage of deposits that commercial banks are required to hold in reserve rather than lend out, used as a monetary policy tool. |
| reserve market model | An economic model that illustrates the relationship between the supply and demand for bank reserves and the federal funds rate. |
| Term | Definition |
|---|---|
| borrowers | Individuals or entities that demand loanable funds by taking loans in the loanable funds market. |
| closed economy | An economy that does not engage in international borrowing, lending, or trade with other countries. |
| demand for loanable funds | The quantity of loanable funds that borrowers are willing to borrow at various real interest rates, showing an inverse relationship with real interest rates. |
| determinants of demand | Factors that influence and cause changes in the quantity of a good or service that consumers are willing and able to buy at various price levels. |
| determinants of supply | Factors that influence the quantity of goods and services producers are willing and able to supply at various price levels. |
| disequilibrium | A market condition in which the quantity supplied does not equal the quantity demanded, causing imbalances that create surpluses or shortages. |
| equilibrium | A market condition in which the quantity supplied equals the quantity demanded at a particular price, with no tendency for change. |
| equilibrium interest rate | The interest rate at which the quantity of loanable funds demanded equals the quantity supplied. |
| equilibrium quantity of funds | The amount of loanable funds exchanged when the quantity demanded equals the quantity supplied. |
| government borrowing | When a government borrows money, typically by issuing bonds, to finance a budget deficit. |
| government spending | Government expenditures that can affect the demand for loanable funds and interest rates. |
| investment tax credit | A tax incentive that reduces taxes on business investment, increasing the demand for loanable funds. |
| loanable funds market | The market where savers supply funds available for borrowing and borrowers demand funds, with the real interest rate serving as the price. |
| market forces | The supply and demand pressures that drive prices toward equilibrium in response to surpluses and shortages. |
| national savings | The total amount of income in an economy that is not spent on consumption, consisting of public savings and private savings in a closed economy. |
| net capital inflow | The net flow of foreign investment into a country, representing the difference between foreign investment in the domestic economy and domestic investment abroad. |
| open economy | An economy that engages in international trade and allows the free flow of goods, services, and financial capital across borders. |
| private savings | The portion of household and business income that is not spent on consumption. |
| public savings | The portion of government tax revenue that is not spent on government consumption and transfer payments. |
| quantity demanded of loanable funds | The amount of funds that borrowers wish to borrow at a given real interest rate in the loanable funds market. |
| quantity supplied of loanable funds | The amount of funds that savers are willing to lend at a given real interest rate in the loanable funds market. |
| real interest rate | The interest rate adjusted for inflation, reflecting the true purchasing power gained or lost from lending or borrowing. |
| savers | Individuals or entities that supply loanable funds by lending money in the loanable funds market. |
| saving behavior | The decisions households and businesses make about how much income to save versus spend, which affects the supply of loanable funds. |
| shortage | A situation in which the quantity demanded of a good exceeds the quantity supplied at a given price, resulting in insufficient supply to meet consumer demand. |
| supply of loanable funds | The quantity of loanable funds that savers are willing to lend at various real interest rates, showing a positive relationship with real interest rates. |
| surplus | A situation in which the quantity supplied of a good exceeds the quantity demanded at a given price, resulting in excess inventory in the market. |
| taxes | Government revenues that affect disposable income and the supply of loanable funds available for borrowing. |