Macroeconomics Ch. 11
Terms
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- real sector
- the market for the production and exchagne of goods and services
- financial sector
- the market for the creation and exchange of financial assets such as money, stocks, and bonds
- interest rate
- equilibrates supply and demand in the financial sector; the price paid for the use of a financial asset
- financial assets
- assets such as stocks or bonds
- bonds
- promises to pay a certain amount plus interest in the future
- money
-
1. highly liquid financial asset that's generally accepted in exchange for other goods (medium of exchange)
2. is used as a reference in valuing other goods (unit of account)
3. a store as wealth - liquid
- easily changeable into another asset or good
- Federal Reserve Bank (Fed) aka U.S. central bank
-
the U.S. central bank whose liabilities (Federal Reserve notes) serve as cash in the United States;
the bank that has the right to issue notes (IOUs) - Fed notes
- money, Fed's IOUs
- bank
- a financial institution whose primary function is accepting deposits for,and lending money to, individuals and firms
- M1
- the narrowest of all definitions; consists of currency in the hands of the public, checking account balances, and traveler's checks
- M2
-
made up of M1 plus savings deposits, small-denomination time deposits, and money market mutual fund shares;
the measure of money often most closely correlated with the price level and economic activity - L
- the broadest measure of money and includes almost all short-term assets (maturity less than 1 yr)
- small-denomination time deposits
- aka certificates of deposit (CDs)
- asset management
- how a bank handles its loans and other assets
- liability management
- how a bank attracts deposits and what it pays for them
- reserves
- currency and deposits a bank keeps on hand or at the Fed or central bank, enough to manage the normal cash infows and outfolows
- reserve ratio
- the ratio of reserves to total deposits (sum of required reserve ratio and excess reserve ratio)
- required reserve ratio
- the ratio banks are required to hold by the Fed
- excess reserve ratio
- additional percentage that banks choose to hold
- simple money multiplier
-
1/r
(r = reserve ratio)
the measure of the amount of money ultimately created per dollar deposited in the banking system, when people hold no currency - approximate real-world money multiplier
-
1/(r+c)
(c = ratio of money people hold in currency to the money they hold as deposits) - FDIC
- Federal Deposit Insurance Corporation
- spread (of a bank)
- the difference between their cots and the interest they pay out, and the interest they take in minus bad loans