Studied by 8 people
loanable funds market
a hypothetical market that brings together those who want to lend money and those who want to borrow money
rate of return
the profit earned on the project expressed as a percentage of its cost on a project
crowding out
occurs when a government deficit drives up the interest rate and leads to reduced investment spending
Fisher effect
an increase in expected future inflation drives up the nominal interest rate by the same number of percentage points, leaving the expected real interest rate unchanged according to it.
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
savings-investment spending identity
savings and investment spending are always equal for the economy as a whole according to it
budget surplus
the difference between tax revenue and government spending when tax revenue exceeds government spending
budget deficit
the difference between tax revenue and government spending when government spending exceeds tax revenue
budget balance
the difference between tax revenue and government spending
national savings
the sum of private savings and the budget balance, is the total amount of savings generate within the economy
capital inflow
equal to the total inflow of foreign funds minus the total outflow of domestic funds to other countries
wealth
the value of accumulated savings
financial asset
a paper claim that entitles the buyer to future income from the seller
physical asset
a claim on a tangible object that gives the owner the right to dispose of the object as he or she wishes
liability
a requirement to pay money in the future
transaction costs
are the expenses of negotiating and executing a deal
financial risk
uncertainty about future outcomes that involve financial losses and gains
diversification
an individual can engage in by investing in several different assets with unrelated risks
liquid
an asset that can be quickly converted into cash without much loss of value
illiquid
an asset that cannot be quickly converted into cash without much loss of value
loan
a lending agreement between an individual lender and an individual borrower
default
occurs when a borrower fails to make payments as specified by the loan or bond contract
loan-backed security
an asset created by pooling individual loans and selling shares in that pool
financial intermediary
an institution that transforms the funds it gathers from many individuals into financial assets
mutual fund
a financial intermediary that creates a stock portfolio and then resells shares of this portfolio to individual investors
pension fund
a nonprofit institution that invests the savings of members and provides them with income when they retire
life insurance company
sells policies that guarantee a payment to a policyholder’s beneficiaries when the policyholder dies
bank deposit
a claim on a bank that obliges the bank to give the depositor his or her cash when demanded
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 easily be used to purchase goods and services
currency in circulation
cash held by the public
checkable bank deposits
bank 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
an asset that individuals acquire for the purpose of trading for goods and services rather than for their own consumption
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
a medium of exchange whose value derives entirely from its official status as a means of payment
monetary aggregate
an overall measure of the money supply
near-moneys
financial assets that can’t be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits
future value
the amount of some current amount of money to which it will grow as interest accumulates over a specified period of time
present value
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. $1/(1+r)
net present value
the present value of current and future benefits minus the present value of current and future costs of a project
bank reserves
the currency that banks hold in their vaults plus their deposits at the Federal Reserve
T-account
a tool for analyzing a business’s financial position by showing, in a single table, the business’s assets and liabilities
reserve ratio
the fraction of bank deposits that a bank holds as reserves
required reserve ratio
the smallest fraction of deposits that the Federal Reserve allows banks to hold
bank run
a phenomenon in which many of a bank’s depositors try to withdraw their funds due to fears of a bank failure
deposit insurance
guarantees that a bank’s depositors will be paid even if the bank can’t come up with the funds, up to a maximum amount per account
reserve requirements
rules set by the Federal Reserve that determine the required reserve ratio for banks
discount window
the channel through which the Federal Reserve lends money to banks
excess reserves
a bank’s reserves over and above its required reserves
monetary base
the sum of currency circulation and bank reserves
money multiplier
the ratio of the money supply to the monetary base. It indicates the total number of dollars created in the banking system by each $1 addition to the monetary base
central bank
an institution that oversees and regulates the banking system and controls the monetary base
commercial bank
accepts deposits and is covered by deposit insurance
investment bank
trades in financial assets and is not covered by deposit insurance
savings and loan (thrift)
type of deposit-taking bank, usually specialized in issuing home loans
federal funds market
allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves
federal funds rate
the interest rate that banks charge other banks for loans, as determined in the federal funds market
discount rate
the interest rate the Fed charges on loans to banks
open-market operation
a purchase or sale of government debt by the Fed
short-term interest rates
the interest rates on financial assets that mature within a year
long-term interest rates
interest rates on financial assets that mature a number of years in the future
money demand curve
shows the relationship between the quantity of money demanded and the interest rate
liquidity preference model of interest rate
the interest rate is determined by the supply and demand for money according to it
money supply curve
shows the relationship between the quantity of money supplied and the interest rate
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Flashcard (105)