AP Macroeconomics Krugman Section 5
Terms in this set (57)
direct trade of goods and services without money exchange
anything that is generally accepted in payment for goods and services
total collection of assets that store value
flow of earnings per unit of time
something that performs the function of money and has alternative uses (e.g. gold, cigarettes, etc.)
something that serves as money but has no other important uses (e.g. paper money, coins)
Medium of Exchange
1 of 3 functions of money: refers to how it can be used to buy goods and services with no complications of barter system
Unit of Account
1 of 3 functions of money: refers to how it can be used to measure the value of all goods and services
Storage of Value
1 of 3 functions of money: refers to how it can be used to store purchasing power for the future; doesn't die or spoil over time
ease with which an asset can be accessed and converted into cash
type of money with high liquidity: includes coins, currency, and checkable deposits (personal and corporate checking accounts); generally is the money supply
type of money with medium liquidity: includes M1 plus savings deposits (money market accounts), time deposits (CDs=certificates of deposit), and mutual funds below $100K
a short-term loan to conduct a transaction, usually with a higher than normal interest rate
the way individuals and families budget, save, and spend
anything of monetary value owned by a person or business
Asset management of individuals
loans, or IOUs, that represent debt that the government or a corporation must repay to an investor; bond holder has no ownership of company
portions of a corporation's profits paid out to stockholders; proportional to corporate profit
Shares of Stocks
partial ownership of a company; stockholders has right to make decisions and is entitled to a percent of the profits
obtained when a stockholder sells stock for more than the purchase price
when a stockholder sells stock at a lower price than purchase price
Purchasing Power (of money)
amount of goods and services an unit of money can buy
people's demand of liquid assets for everyday purchases; inverse relationship between nominal interest rates and quantity of money demanded
The supply and demand for money. Nominal interest rates on vertical axis, quantity of money on horizontal axis. MS is vertical.
Money Demand Shifters
changes in price level, income, and technology to access money
FED (Federal Reserves)
a nonpartisan government office that sets and adjusts the money supply to adjust the economy
FED's action in adjusting the money supply to achieve macroeconomic goals (typically to keep unemployment and inflation low)
downward-sloping curve showing inverse relationship between quantity of investment and nominal interest rates
Fractional Reserve Banking
a banking system where only a small percent of money is kept in the safe while the rest is loaned out
percent of deposits that banks must hold in reserve (the percent that banks cannot loan out)
1/Reserve Requirement; the degree of money supply expansion that results from an initial money deposit
interest rate that the FED charges commercial banks
Expansionary Monetary Policy
the FED's action that increases the money supply.
Lower discount rate
Lower reserve ratio
Contractionary Monetary Policy
the FED's action that decreases the money supply
Raise discount rate
Raise reserve ratio
Open Market Operations
when FED buys or sells government bonds/securities; the most important and widely used monetary policy
Federal Funds Rate
the interest rate that banks charge one another for one-day loans of reserves; fluctuates due to market conditions but is heavily influenced by monetary policy (especially open market operations) to reach FED's target rate
general cost of borrowing money/capital
Real Interest Rate
percent increase in purchasing power that a borrower pays (nominal interest rate - expected inflation)
Nominal Interest Rate
percent increase in money that the borrower pays, not adjusted for inflation (real interest rate + expected inflation)
Loanable Funds Market
private sector supply and demand of loans; nominal interest rate versus quantity of loans
LFM Demand Shifters
Change in perceived business opportunities and government borrowing (budget deficit/surplus)
LFM Supply Shifters
Changes in private savings behavior, public savings, foreign investment, and expected profitability
Fed Funds Market
allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves.
The present value of $1 realized one year from now is $1/(1 + r)
Money flowing in from other countries counts as part of savings in an open economy.
In a closed economy savings = national savings = private savings + government budget balance
In an open economy savings = national savings + capital inflow.
The monetary base is the sum of
currency in circulation and bank
Excess reserves are a bank's
reserves over and above its required
Crowding out occurs when a government
deficit drives up the interest rate and leads to
reduced investment spending.
Functions of the federal reserve
1. Provide financial services to banks.
2. Supervise and regulate banks.
3. Maintain stability of financial system.
4. Conduct monetary policy.
Why is money demand curve downward sloping
demand curve slopes downward because, other things equal, a higher interest rate increases
the opportunity cost of holding money, leading the public to reduce the quantity
of money it demands.
When and why was Federal Reserve System created
1913 in response to panic of 1907
Structure of the Federal Reserve
Board of Governors and 12 regional Federal Reserve Banks
What does the Board of Governors do? how many members? how are they chosen, how long do they serve? Why?
The Board of Governors oversees the entire system.
Appointed by the president and must be approved by the Senate
Appointed for 14-year terms,
To insulate them from political pressure in their
conduct of monetary policy.
What does the Federal Open Market Committee do? How many members? Who is always on the committee? Who rotates membership?
Always on Committee: Board of Governors + President of Federal Reserve Bank of New York
11 other bank presidents have rotating membership.
According to the Fisher effect, an
increase in expected future inflation
drives up the nominal interest rate,
leaving the expected real interest rate