Macroeconomics Exam 2 Part 2

Gross Investment

The purchase of physical capital (machines, equipment)

Net Investment

The purchase of physical capital LESS depreciation

(gross investment - depreciation)

Depreciation

The change in the market value of physical capital.

Financial Intermediaries

Institutions that channel funds from savers to borrowers.

Commercial Banks

Normal banks that accept deposits, provide payment services, and make loans.

(ppl’s savings are given to bank which loans $ to companies)

Government-backed mortgage lenders

Companies that buy mortgages, package them into mortgage-backed securities, and sell them

Pension Funds

Financial institutions that invest pension contributions of companies and workers, a retirement fund.

Insurance Companies

Institutions that provide risk management and invest premiums to earn returns.

Federal Reserve

The central bank of the United States.

Mutual Funds/Hedge Funds

Investment vehicles that pool money from multiple investors to purchase securities.

Net Worth

The value of loans a financial intermediary has given out LESS the amount deposited.

loans - deposits

Insolvent

When an institution owes more money than it is owed.

Illiquid

When a financial institution does not have enough cash on hand.

Loans

Individuals/banks give a company money, and the company pays interest on the loan + pays back the original ammount

Financial Instruments (Markets)

Tools that firms and individuals use to raise money, include loans, bonds, and stocks

Bonds

Individuals give the government/company money, they say IOU

Stocks

Individuals give money to a company and hope that the company gets bigger

Wealth

The value of amount you own - the amount you owe

Assets

Stuff I own

Liability

Stuff I owe

Capital Gains

The increase in market value of assets.

Capital Losses

The decrease in market value of assets.

Savings

The amount earned minus the amount spent in a given period.

Real Interest Rate

The interest rate adjusted for inflation.

Loanable Funds

The supply and demand for funds available for borrowing.

Aggregate Expenditure

Total spending in the economy, expressed as Y = C + I + G + NX.

Consumer Spending (C)

The largest component of aggregate expenditure.

Marginal Propensity to Consume (MPC)

The percentage of income spent on consumption.

Marginal Propensity to Save (MPS)

The percentage of income saved.

Inverse Relationship

A relationship where one variable increases as the other decreases, such as interest rates and borrowing.

Multiplayer Effect

The amplification of initial changes in spending through the economy.