| A | B |
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| Stock | A certificate that represents a claim to or share of the ownership of a firm. |
| Equity Financing | The firm's method of raising funds for investment by issuing shares of stock to the public. |
| Bank | A financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investments or investment spending needs of borrowers. |
| Bond | A certificate of indebtedness from the issuer to the bondholder. |
| Debt Financing | A firm's way of raising investment funds by issuing bonds to the public. |
| Interest Rate | The price, calculated as the percentage of the amount borrowed, charged by the lender. |
| Expected Real Rate of Return | This is the rate of profit the firm anticipates receiving on investment expenditures. It can be thought of as the marginal benefit of an investment project. |
| Real Rate of of Interest | The cost of borrowing to fund an investment; equal to the nominal interest rate minus the expected rate of inflation. |
| Decision to Invest | A firm will invest in projects so long as the expected rate of return is at least as great as the real interest rate. |
| Investment Demand | The negative relationship between the real interest rate and the cumulative dollars invested. |
| Autonomous Investment | The level of investment determined by investment demand that is independent of the level of gross domestic product (GDP). |
| Market for Loanable Funds | Equilibrium in this market is determined at the real interest rate where the quantity of dollars saved (supply) is equal to the quantity of dollars borrowed (demand). |
| Demand for Loanable Funds | The negative relationship between the real interest rate and the dollars invested by firms. |
| Private Saving | Saving conducted by households; equal to the difference between disposable income and consumption |
| Public Saving | Saving conducted by government; equal to the difference between tax revenue collected and spending on goods and services. |
| Supply of Loanable Funds | The positive relationship between the dollars saved and the real interest rate. |
| Fiat Money | Paper and coin money used to make transactions because the government declares it to be legal tender. Because it has no intrinsic value, it is backed by the public's trust that the government maintains its value. |
| Functions of Money | Money serves three functions: a medium of exchange, a unit of account; and a store of value. |
| Money Supply | The fixed quantity of money in circulation at a given point in time as measured by the central bank. |
| Monetary Base | The sum of currency in circulation and bank reserves |
| M0 | The most liquid measure of money definitions and the basis for all other more broadly defined measures of money. (Cash and Coins) |
| M1 | Checking deposits and traveler's checks |
| Liquidity | A measure of how easily an asset can be converted to cash |
| Transaction Demand | The amount of money held in order to make transactions. |
| Asset Demand | The amount of money demanded as an asset is negatively related to the real interest rate. |
| Money Demand | The negative relationship between the nominal interest rate and the quantity of money demanded as an asset plus the quantity of money demanded for transactions |
| Theory of Liquidity Preference | John Maynard Keynes' theory that the interest rate adjusts to bring the money market into equilibrium |
| Fractional Reserve Banking | A system in which only a fraction of the total money deposited in banks is held in reserve as currency |
| Reserve Ratio | The fraction of total deposits that must be kept on reserve |
| Required Reserves | The portion of a deposit that must held at the bank for withdrawals. |
| Excess Reserves | The portion of a deposit that may be borrowed by customers. |
| T-Account | A tabular way to show the assets and liabilities of a bank. |
| Assets | Anything owned by the bank or owed to the bank. Cash on reserve and loans made to citizens are examples. |
| Liabilities | Anything owned by depositors or lenders is a liability to the bank. Checking deposits and loans made to the bank are examples. |
| Money Multiplier | Measures the maximum amount of new checking deposits that can be created by a single dollar of excess reserves. (1/RR) |
| Expansionary Monetary Policy | Increases in the money supply meant to decrease interest rates, shift aggregate demand to the right toward full employment, and reduce the unemployment rate. |
| Contractionary Monetary Policy | Decreases in the money supply meant to increase interest rates, shift aggregate demand to the left toward full employment, and reduce inflationary pressures. |
| Open Market Operations | A tool of monetary policy, it involves the FED's buying (or selling) of treasury bonds from (or to) commercial banks and the general public. |
| Federal Funds Rate | The interest rate paid on short-term loans made from one bank to another. When this rate is a target for an open market operation, bonds are bought or sold accordingly until the interest rate target has been met. |
| Discount rate | The interest rate commercial banks pay on short term loans from the FED. |
| M2 | Savings deposits, small time deposits and money markets |
| M3 | Large time deposits and money market funds |
| Time value of money | Money today is more valuable than the same amount of money in the future |
| Present Value | If r is the current interest rate, the present value of $1 received one year from now is $1/(1 + r) |
| Future Value | If r is the current interest rate, the future value of $1 invested today is $1*(1 + r) |
