Financial System & Macroeconomics Fundamentals

Vocabulary flashcards covering key concepts in financial systems, money, inflation, and unemployment as discussed in the lecture notes.

Financial System

A network of institutions that channels funds from savers to borrowers.

Market for Loanable Funds

The marketplace where saving supplies funds and investment demands them.

Investing

Using money to purchase capital goods like machines or buildings.

Saving

Setting aside money in financial assets such as stocks or bonds.

Standard Deviation of Stock and Bond Returns

Statistical measure of return volatility; higher values indicate greater risk.

Savings Incentives

Policies that encourage higher saving—e.g., tax advantages on retirement accounts.

Borrowing Incentives

Policies that make borrowing more attractive—e.g., lower interest rates.

Present Value (PV) Equation

PV = FV / (1 + r)^n; the current worth of a future sum of money.

Future Value (FV) Equation

FV = PV × (1 + r)^n; the amount today’s money grows to after n periods at rate r.

Firm-Specific Risk

Risk unique to a single company; reducible through diversification.

Market Risk

Economy-wide risk affecting all assets; cannot be eliminated.

Fundamental Analysis

Evaluating a firm’s financial data to estimate its intrinsic stock value.

Efficient Market Hypothesis

Theory that asset prices already incorporate all publicly available information.

Cyclical Unemployment

Joblessness caused by economic downturns or recessions.

Frictional Unemployment

Short-term unemployment from normal job search and transitions.

Structural Unemployment

Unemployment arising from a mismatch between workers’ skills and job requirements.

Efficiency Wages

Above-equilibrium wages paid to boost worker productivity and reduce turnover.

Money as a Store of Value

Function of money allowing wealth to be held over time.

Money as a Unit of Account

Function of money providing a standard measure for pricing goods and services.

Money as a Medium of Exchange

Function of money enabling it to be widely accepted in transactions.

U.S. Average Unemployment Rate

Historically about 5–6 % over the long run.

U.S. Average Inflation Rate

Roughly 2–3 % per year in recent decades.

Compound Interest Equation

A = P(1 + r)^n, where A is the accumulated amount from principal P at rate r for n periods.

Nominal Value

A monetary amount unadjusted for inflation.

Real Value

A monetary figure adjusted for inflation, reflecting true purchasing power.

Money Neutrality

Long-run idea that changes in money supply affect price level but not real output.

M1 Money Supply

Currency, demand deposits, and traveler’s checks—highly liquid assets.

M2 Money Supply

M1 plus savings deposits, small time deposits, and money-market funds.

Open Market Operations

Fed purchases or sales of government bonds to influence the money supply.

Money Costs of Inflation

Broad category of economic costs incurred when inflation is high.

Shoe-Leather Costs

Extra effort and time people spend managing cash holdings during inflation.

Unit of Account Costs

Confusion and inefficiency in price comparisons caused by inflation.

Inflation Fallacy

Incorrect belief that inflation necessarily lowers real incomes.

Inflation Tax

Erosion of purchasing power experienced by cash holders during inflation.

Menu Costs

Expenses firms face when changing listed prices (e.g., printing new menus).

Fisher Effect

Principle stating that nominal interest rates rise one-for-one with expected inflation, leaving real rates unchanged.

Federal Reserve (The Fed)

U.S. central bank responsible for monetary policy, bank regulation, and economic stabilization.

Money Multiplier

1 / Reserve Ratio; shows how much the money supply expands per dollar of reserves.

Classical dichotomy

economic theory that separates real variables (like output and employment) from nominal variables (like prices and money supply), suggesting that changes in the money supply do not affect real economic factors in the long run.