AP Macroeconomics Unit 3 The Financial Sector Vocab: Ch. 31/32 Exam Dates: 3/27 and 3/28

Money and Assets Q: What characteristics of a dollar bill makes it a good form of money? It all used to be a barter system… Gold, silver, jewelry, tobacco, beer, cattle, metal coins, paper bills, checks, etc. Became too inefficient: Double coincidence of wants Too time consuming and could hinder large economic development…so… Money facilitates trade and makes it more efficient.

Money and Assets Money has 3 functions in an economy: 1. Medium of Exchange: Money is used to trade for goods/services, is accepted by all, is portable, and is divisible for big and small transactions. 2. Store of Value: Holds purchasing power over time and is stable in value. 3. Unit of Account (Standard of Value): Used as a measure to set prices (i.e. Measure distance in miles and value of commodities in dollars) Commodity vs. Fiat Money

Defining and Measuring the Money Supply Liquidity: the ease by which an asset can be turned into cash. Asset: A resource with economic value with the expectation that it will provide future benefit (i.e. investments, stocks and bonds, etc.) Money Supply: The entire stock of currency and other liquid assets in a country's economy at a particular time. The Federal Reserve (U.S. Central Bank) must provide a definition of what is included as money.

Defining and Measuring the Money Supply The Fed uses monetary aggregates to determine the money supply: 1. M0 = Paper currency (Federal Reserve Notes) and coins (U.S. Treasury) 2. M1 = M0 + demand deposits (checkable deposits, Negotiable Order of Withdrawal account (NOW ) Most liquid components used to quantify amount of money in circulation. M1 is a measure of money that can be directly used for transactions.

Defining and Measuring the Money Supply M2 = M0 + M1 +… Savings deposits Money Market shares (interest bearing accounts with minimum balance requirements and withdrawal limits) Small Time deposits- less than $100,000 (CD- Certificate of Deposit issued by banks and credit unions.) M2 = M1 + several Near Monies: Highly liquid financial assets. Note: Each category becomes broader- it includes the previous category plus additional forms of money. Note: M0 and M1 are used as medium of exchanges and M2 are used as store of value.

Financial Assets Financial Markets: Facilitate funds from lenders to borrowers- Households invest savings in financial assets. Financial Markets serve 3 functions: 1. Reduce transactions costs by matching borrowers and lenders. 2. Reduce the risk taken by lenders (diversification of portfolio.) 3. Provide liquidity (access to cash) through financial intermediaries. Financial Asset: A paper claim that entitles its buyer to future income from the seller. 4 types of financial assets… 1. Stock: Share in the ownership of a company 2. Bond: IOU issued by borrower with promise to pay fixed interest payments at regular intervals and repay principal on specified date. 3. Loan: Agreement to repay plus interest 4. Bank Deposits: Money placed into a banking institution for safekeeping (Savings, checking, money market accounts.)