Section 5 Vocab

interest rate

the price (calculated as a percentage of the amount borrowed) charged by lenders to borrowers for the use of their savings for one year

budget surplus

the difference between tax revenue and govt spending when tax revenue > govt spending

budget deficit

the difference between tax revenue and govt spending when govt spending > tax revenue

budget balance

the difference between tax revenue and govt spending

national savings

the sum of private savings and the budget balance, the total amount of savings generated within the economy

capital inflow

the total inflow of foreign funds minus the total outflow of domestic funds to other countries

financial risk

uncertainty about future outcomes that involve financial losses and gains

liability

a requirement to pay money in the future

physical asset

a claim on a tangible object that gives the owner the right to dispose of the object as he or she wishes

wealth

the value of accumulated savings in a household

financial asset

a paper claim that entitles the buyer to future income from the seller

transaction cost

the expenses of negotiating and executing a deal

liquid

an asset is of this quality if it can be quickly converted to cash

illiquid

an asset is of this quality if it cannot be quickly converted to cash

loan

a lending agreement between an individual lender and individual borrower

financial intermediary

an institution that transforms the funds it gathers from many individuals into financial assets

bank

a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance borrowers’ investment spending on illiquid assets

money

any asset that can be used to purchase goods and services

money supply

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

store of value

a means of holding purchasing power over time

unit of account

a measure used to set prices and make economic calculations

commodity money

a good used as a medium of exchange that has intrinsic value in other uses

commodity-backed money

a medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods

fiat money

medium of exchange whose value derives entire from its official status as a means of payment

monetary aggregate

the overall measure of the money supply

future value

the amount to which a current amount of money will grow to as interest accumulates over time

present value

$1 realized one year from now is $1/(1+r): the amount of money you must lend out today in order to have $1 in one year. It is the value to you today of $1 realized one year from now.

net present value

the present value of current and future benefits - current and future costs