Macroeconomics - 4.1, 4.2, 4.3, 4.4, 4.5, 4.6

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Interest Rate

The price calculated as a percentage of the amount borrowed, charged by lenders to borrowers fro the use of their savings for one year.

Savings-Investment spending identity

A fact of accounting that says savings and investment spending are always equal.

Budget Surplus

The difference when the government collects more tax revenue than it spends

Budget Deficit

When government spending exceeds tax revenue (a negative budget surplus)

Budget Balance

Both budget deficit and budget surplus is referred to as budget balance, with the understanding that it can be positive or negative

National Savings

Sum of private savings and the budget balance

Capital Inflow

The net effect of international inflows and outflows of funds on the total savings available for investment spending in any given country

Wealth

The total value of all assets owned by an individual or household minus any liabilities(debts)

Financial Asset

→ A paper claim that entitles the buyer to future income from the seller

Physical Asset

Tangible items that have value can be used or sold

Liability

A requirement to pay the lended money back in the future

Transaction Cost

The expenses of actually putting together and executing a deal.

Financial risk

Uncertainty about future outcomes that involve financial losses or gains

Diversification

Investing in several assets with unrelated, or independent, risks

• Allows business owners to lower their total risk of loss.

Liquid

An asset is liquid if as with money deposited in a bank it can be quickly converted into cash without much loss of value

Illiquid

An asset is illiquid if, as with a business, car or home, it cannot be quickly converted into cash without much loss of value.

Loan

When a saver lends funds to a company, the loan is a financial asset sold by the company that entitles the lender(the buyer) to future income from the company

Default

The risk that the bond issuer might fail to make payments as specified by the bond contract.

Loan-backed security

Assets created by pooling individual loans and selling shares in that pool (a process called securitization)

Financial intermediary

An institution that transforms funds gathered from many individuals into financial assets.

Mutual Fund

A financial intermediary that creates a stock portfolio by buying and holding shares in companies and then selling shares of the stock portfolio to individual investors

Pension Fund

Non profit institutions that collect the savings of their members and invest those funds in a wide variety of assets, providing their members with income when they retire.

Life insurance company

Guarantees a payment to the policyholder’s beneficiaries (typically the family) when the policyholder dies.

Bank Deposit

Claims on a bank that oblige the bank to give a depositor his or her cash when demanded

Bank

Institution that helps resolve the conflict between lender’s need for liquidity and the financing needs to borrowers who don’t want to use the stock or bond markets. Facilitate the flow of funds from lenders to borrowers.

Future Value

The accumulation of interests turns any amount you have today into a greater sum

Present Value

Net present value

Money

Any asset that can easily be used to purchase goods and services

Currency in circulation

Actual cash in the hands of the public, is considered money

Checkable bank deposits

Banks accounts on which people can write checks

Money supply

The total value of financial assets in the economy that are considered money

Medium of exchange

Accepted for payments

Store of value

Meaning that money can hold its value over time, allowing people to save and use it in the future without it losing purchasing power

Unit of account

Helps to measure the relative value of different goods and services

Commodity money

Has intrinsic value, you can do something with it

Commodity-backed money

Gold standards

Fiat money

Like currency, has no other value to it and you can’t do anything with it

Monetary aggregate

Overall measures of the money supply

Near-moneys

Financial assets that aren’t directly usable as a medium of exchange but can be readily converted to cash or checkable bank deposits

Central Bank

• Oversee and regulate the nation’s commercial banks by making sure that banks have enough money in reserve to avoid bank runs

• Conduct monetary policy

Commercial Bank

Banks that mainly make business loans, as opposed to home loans

Investment Bank

A financial institution that helps firms raise capital and deals with stocks, bonds and mergers. It does not take deposits

Savings and Loan (thrift)

A bank that takes savings deposits and mainly makes homemortage and loans

Federal funds market

A financial market that allows banks that fall short of the reserve requirement to borrow reserves (usually just overnight) from banks that are holding excess reserves

Federal funds rate

The interest rate determined by supply and demand in the federal market

Discount rate

The interest rate the Fed charges on the loans that banks who are in need of reserves take

Open-market operation

This is when the federal reserve buys or sells short term government bonds

Monetary Policy

Increasing or decreasing the money supply to speed up or slow down the overall economy

Federal Reserve System

Created as a way to compel all deposit-taking institution to hold adequate reserves and to open their accounts to inspection by regulators

Bank reserves

Currency in bank vaults and at the Federal Reserve, not help by the public, they are not part of currency in circulation

T-account

Summarizes the bank’s financial position by showing, in a single table, the business’s assets and liabilities, with assets on the left and liabilities on the right

Reserve ratio

% of deposits banks must hold in reserve

Required reserve ratio

Bank run

Deposit insurance

a guarantee that depositors will be paid even if the bank can’t come up with the funds

Reserve requirments

Rules set by the Federal Reserve that establish the required reserve ration for banks

Discount window

A source of loans from the Federal Reserve when they’re needed

Excess reserves

Bank reserves over an above their required reserves. This is the amount they can loan out

Monetary base

Made up of bank reserves which are not part of the money supply and currency and circulation which is part of the money supply

Money multiplier

The ratio of the money supply to the monetary base

Federal Deposit Insurance Corporation

Provides deposits insurance up to a maximum amount per account

Short-term interest rates

Rates on financial assets that come due, or mature, within a year

Long-term interest rates

Interest rate on financial assets that mature, or come due, a number of years in the future

Nominal Interest rate

Refers to the interest rate before taking inflation into account. Can also be referred to the advertised or stated interest rate on a loan, without taking into account any fees or compounding of interest.

Money demand curve

The relationship between the interest rate and the quantity of money demanded by the public is illustrated

Money market graph

Liquidity preference model of the interest rate

This model says that the interest rate is determined by the supply and demand for money in the market for money

Loanable Funds Market

A simplified model is which the economists assume that there is just one market that brings together those who want to lend money(savers) and those who want to borrow money(firms with investment spending projects)

Rate of return

Crowding out

The negative effect of government budget deficits on investment spending

Fisher effect

An increase in expected inflation drives up the nominal interest by the same number of percentage points, leaving the expected real interest rate unchanged

Nominal Interest rate

Real interest rate