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AP Macro Unit 4...LETS GO!
This is a draft cheat sheet. It is a work in progress and is not finished yet.
4.1 Financial Assets
Asset |
Anything of value that can be converted into cash |
Cash, real estate, jewelry, car, bonds, stocks |
Liquidity |
Ease (speed and value) with which an asset can be converted into cash |
The Barter System |
Goods and services are traded directly w/o exchange of money |
Problems: 1) Each trader must have something the other wants 2) Some goods cannot be split (Ex: 1 goat = 5 chickens, __ goat = 1 chicken) |
Securities |
A form of ownership can be easily traded on a secondary market. INTANGIBLE investment! |
Stocks, bonds, mutual funds |
Bond |
An interest-bearing asset often issued by businesses or the govt. Bond holders have NO OWNERSHIP of the company. Bonds are sometimes referred to as securities. |
Why do bonds have an inverse relationship w int rates? |
Most bonds pay a fixed int rate, so as int rates bonds become more desirable. |
Stock |
A security that gives you ownership in a company |
How can stockowners earn a profit? |
1) Dividends portions of a corporation’s profits are paid out to stockholders. The higher the corporate profit, the higher the dividend. 2) Capital gain Earned when a stockholder sells stock for more than they paid for it. |
Treasury Securities (Open Market Operations) |
1) Treasury Bills (T-Bills) Mature in 1 yr or less. Sold @ < face (par) value & can’t be redeemed before maturity 2) Treasure Notes (T-Notes) Mature in 2-10 yrs. You collect semi-annual int (“coupon payments”) and then cash it in for face value at maturity 3) Treasury Bonds (T-Bonds) Mature in 20-30 yrs 4) Treasury Inflation-Protected Securities (TIPS) Par value adjusted to CPI semi-manually. 5, 10, 30 yr maturity. |
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4.3 Defintion, Measurement, and Functions of Money
Money |
Anything generally accepted as payment for goods and services. 1) Commodity Money: Something that performs the function of money but also had alt uses 2) Commodity-Backed (Representative) Money: Paper money backed by gold, silver. Guaranteed by a promise 3) Fiat Money: Something that serves as money but has no other important uses |
1) Commodity Money: Gold, silver, cigarettes, ramen 3) Fiat Money: Paper money, coins |
Functions of Money |
1) Medium of Exchange An asset individuals use to trade for goods and services rather than consumption 2) Unit of Account: Unit of measure of the “value” of things. Used to set prices and make economic calculations. It is divisible ($1 = 4 quarters), fungible ($1 = $1), & countable 3) Store of Value: Money holds purchasing PP for the future, and it doesn’t die or spoil. Money = DURABLE. |
- 1) Medium of Exchange Retired couple spends $9000 on a month-long vacation 2) Unit of Account Name-brand good is 2x as $ as a similar, generic good. 3) Store of Value: HS senior deposits his part-time salary into a savings account. A bank invests $10 million into a stock and bond portfolio. |
Measurements of MS (Money Aggregates) |
1) M1 Coins, paper currency, checkable deposits (including checking and debit accounts) 2) M2 Near money accounts below $100,000 including savings deposits, MM accounts, certificates of deposits. ALSO mutual funds, bonds, securities. 3) M3 Near money accounts $100,000+ including M2 |
- 1) M1 Function: Medium of Exchange, Liquidity: High 2) M2 Function: Store of Value, Liquidity: Medium 3) M3 Function: Unit of Account, Liquidity: Low |
What backs our money supply? |
NO GOLD STANDARD - $ is an IOU from the govt for all debts (public/private) |
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Debit Card |
- Money A way to access checkable deposits (money) |
Credit Card |
- Money Short-term loan w a high int rate if not paid off. Liability, not asset. |
- You buy a shirt w a CC Visa pays the store You pay VISA the price of the shirt + interest and fees (maybe) |
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4.2 Nominal and Real Interest Rates
Nominal Int Rate |
Int rate that hasn't been adjusted for inflation |
NIR = RIR + inflation |
Real Int Rate |
Int rate that has been adjusted for inflation |
RIR = NIR - inflation |
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