Unit 4: Financial Sector 💶

Liquidity

The ease with which a financial asset can be accessed and converted into cash.

Rate of return

Net gain/loss of an investment over a specified period.

Risk

The chance that an outcome or an investment’s actual gains differ from the expected outcome.

Stock

A certificate that represents a claim to, or share of the ownership of a firm.

Equity financing

The firm’s method of raising funds for investment by issuing shares of stock to the public.

Bond

A certificate of indebtedness from the issuer to the bondholder.

Debt financing

A firm’s way of raising investment funds by issuing bonds to the public.

Loans

The process of borrowing money and repaying it with interest.

Bank Deposits

Money in your bank account, can include checking accounts and demand deposits.

Monetary Base

Money circulation or in the bank reserves, including physical currency used by the economy.

Nominal interest rate

The stated interest rate without adjustment for inflation.

Real interest rate

The nominal interest rate adjusted for inflation.

Inflation

The rate at which the general level of prices for goods and services is rising.

Fiat Money

Paper and coin money that has no intrinsic value but is backed by government trust.

Commodity Money

Something that has value and can be used as money, like precious metals.

Medium of exchange

A function of money that facilitates transactions by providing a common measure of value.

Unit of account

A function of money that measures the value of goods and services.

Store of value

A function of money that preserves value over time.

Money supply

The total amount of money in circulation in an economy.

M1

The most liquid definition of money, including cash, coins, and checking deposits.

M2

A broader measure of money supply that includes M1 plus savings accounts and other deposits.

Fractional reserve banking

A banking system where only a fraction of deposits are kept as reserves.

Reserve ratio (rr)

The fraction of a bank’s total deposits kept on reserve.

Excess reserves

Cash reserves held by banks above the minimum requirement.

Money multiplier

The maximum amount of new checking deposits created from a single dollar of excess reserves.

Transaction demand

The amount of money held for transaction purposes, not affected by interest rates.

Asset demand

The amount of money held as an asset, inversely related to interest rates.

Money demand curve

A graph showing the total demand for money, influenced by transactions and assets.

Federal Reserve Tools

Instruments like open market operations and discount rate changes used to influence monetary policy.

Expansionary monetary policy

A policy aimed at increasing money supply to stimulate economic growth.

Contractionary monetary policy

A policy aimed at reducing money supply to control inflation.

Open market operations (OMOs)

The buying and selling of securities by the Fed to control money supply.

Federal funds rate

Interest rate at which banks lend to each other overnight.

Discount rate

Interest rate banks pay on loans from the Federal Reserve.

Required Reserve Ratio

Minimum percentage of deposits that banks must hold as reserves.

Demand for Loanable Funds

Quantity of credit wanted by borrowers at every real interest rate.

Supply of Loanable Funds

Quantity of credit provided by lenders at every real interest rate.

Loanable Funds Market

Market where borrowers and lenders interact to determine interest rates.

Interest rates

The cost of borrowing money, expressed as a percentage.

Nominal GDP

The total value of goods and services produced in an economy at current prices.

Transaction Costs

Costs associated with exchanging goods and services.

Aggregate Demand (AD)

The total demand for goods and services within an economy.

Real GDP

The total value of goods and services produced in an economy, adjusted for inflation.

Positive real interest rate

When nominal interest rates exceed inflation rates.

Negative real interest rate

When nominal interest rates fall below inflation rates.

Asset of a bank

Anything owned by the bank or owed to the bank.

Liability of a bank

Anything owed by the bank to depositors or other lenders.

Cost of capital

The required return necessary to make a capital budgeting project worthwhile.

Investment,

The purchase of goods that will be used in the future to create wealth.

Purchasing power

The value of money expressed in terms of the amount of goods or services that one unit of money can buy.

Credit cards

A form of borrowing that allows users to make purchases with borrowed funds.

Discount Window

The facility used by banks to borrow funds from the Federal Reserve.

Expectations for the Future

Predictions individuals and firms make regarding future economic conditions.

Deficit Spending

Spending by the government that exceeds its revenue.

Sovereign debt

Debt issued by a national government in its own currency.

Investment banks

Financial institutions that help in raising capital for companies.

Microeconomics

The branch of economics that focuses on individual agents.

Macroeconomics

The branch of economics that studies the behavior of an economy as a whole.

Financial market

A market for the exchange of financial assets, such as stocks and bonds.

Securities

Financial instruments that represent an ownership position.

Capital gains

Increases in the value of an asset or investment over time.

Inflation rate

The percentage increase in the price level of goods and services.

Interest rate risk

The potential variability in returns due to changes in interest rates.

Capital allocation

The process by which financial resources are distributed among competing uses.

Total assets

The sum of everything a bank owns, including loans and reserves.

Interest rate policy

Central bank decisions regarding the levels at which interest rates will be set.

Financial stability

A condition where the financial system operates efficiently without major disruptions.

Consumer spending

The total money spent by consumers in the economy.

Government bonds

Debt securities issued by a government to support spending.

Foreign investment

Investment made by individuals or firms in one country in business interests in another country.

Savings accounts

Bank accounts that earn interest on deposits while maintaining liquidity.

Peer-to-peer lending

A method of borrowing and lending without the use of an official financial institution.