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AP Macro Unit 4 Cheat Sheet (DRAFT) by

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

Anything of value that can be converted into cash
Cash, real estate, jewelry, car, bonds, stocks
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)
A form of ownership can be easily traded on a secondary market. INTANGIBLE invest­ment!
Stocks, bonds, mutual funds
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.
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.

4.3 Defintion, Measur­ement, and Functions of 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)
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)

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