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AP Macroeconomics

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 …

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AP Macroeconomics

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

  2. 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.

  3. Money and Assets • Money has 3 functions in an economy: • 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. • Store of Value: Holds purchasing power over time and is stable in value. • 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

  4. 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.

  5. Defining and Measuring the Money Supply • The Fed uses monetary aggregates to determine the money supply: • M0 = Paper currency (Federal Reserve Notes) and coins (U.S. Treasury) • 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.

  6. 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.

  7. Financial Assets • Financial Markets: Facilitate funds from lenders to borrowers- Households invest savings in financial assets. • Financial Markets serve 3 functions: • Reduce transactions costs by matching borrowers and lenders. • Reduce the risk taken by lenders (diversification of portfolio.) • 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… • Stock: Share in the ownership of a company • Bond: IOU issued by borrower with promise to pay fixed interest payments at regular intervals and repay principal on specified date. • Loan: Agreement to repay plus interest • Bank Deposits: Money placed into a banking institution for safekeeping (Savings, checking, money market accounts.)

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