UNIT 3 - ECONOMICS

economics

LIQUIDITY

the ease with which they can be converted into cash

CHECKING ACCOUNT (your wallet)

bank acc used for everyday transactions

SAVINGS ACCOUNT (your piggy bank)

banks hold funds/income for future. money deposited = earn interest

CREDIT SCORE

determines how worthy you are to receive new credit. raising score= prioritize on time payments, keep a low credit utilization, grow length of credit history.

DEBIT

allows you to access the money in your bank acc

CREDIT

allows you to buy something now with borrowed money and pay for it later/over time

BANK’S MAIN FUNCTION

financial intermediary. brings together sellers and buyers and borrowers

BANK’S MAKE PROFIT

by charging more interest on loans than they pay on deposits

Why should you put aside money as savings?

financial misfortune can strike anytime

CONSUMER LOANS (short term)

major purchases such as a new car/boat

COMMERCIAL LOANS

buy machinery, equipment, and materials to pay labor costs

MORTGAGE LOANS (long term)

used to buy a house, an office building, land, or other real estate

INTEREST on a loan

the extra cost you pay for borrowing the principal, usually expressed as a percentage of the principal

PRINCIPAL on a loan

the amount of money actually borrowed

CERTIFICATE OF DEPOSIT (CD)

a savings account with a fixed term and higher interest, but you can't withdraw early without a penalty

GOVERNMENT BONDS

loan to a gov and guarantees the lender a fixed rate of interest over the term of the loan. low risk, low return

CORPORATE BONDS

bond → corporation to raise money for its operations. low risk, high return

STOCKS

ownership of a fraction of the issuing corporation/company. high risk, high return

MUTUAL FUNDS

collection of securities chosen and managed by group of professionals. medium risk, medium return

DIVERSIFICATION

investing in wide variety of assets for your investment plan

FEDERAL RESERVE (The Fed)

central bank of the U.S. serves as a "bank” for other banks. goal= keep entire banking system stable

How does the Fed speed up the economy?

lowering interest rates by printing more money to encourage borrowing and spending

How does the Fed slow down the economy?

raising interest rates to reduce money supply and discourage borrowing and spending