Chapter 8 Econ. Vocabulary

Legal tender

U.S. dollars are this country's __________ --they must be accepted as money for purchases and as payment for debt.

Purchasing power

__________ refers to the quantity of goods and services that can be bought with a particular sum of money.

Commodity money

Economists categorize all of these items of exchange as _________. A commodity--a good that has value in trade--becomes _________ when it is used as a medium of exchange.

Bank

A __________ is a business that receives deposits and makes loans.

Loan

A _________ is a transaction in which a lender gives money to a borrower, who agrees to repay the money at some point in the future.

Banknotes

These early banks accepted depositors' elaborate paper receipts known as _________.

Commodity-backed money

Economists call banknotes given in exchange for gold and silver _____________.

Fiat money

Thus paper money issued without backing of gold or silver came to be known as __________.

Currency

Together, bills and coins circulation throughout the economy are known as __________.

Money supply

Currency, however, is only part of a nation's ___________, or the total amount of money in the economy.

Assets

The answer depends on the kinds of _________ economists choose to count as money in addition to currency.

Anything owned to which a market value can be assigned.

M1

The most common measure of money used by economists today is known as __________.

___________ includes liquid assets that can used as cash or can easily be converted into cash.

Liquid assets

M1 includes __________ that can be used as cash or can easily be converted into cash.

Checkable deposits

Most of the rests consists of what economists call __________, or deposits in bank checking accounts.

Check

A __________ is a signed form instructing a bank to pay a specified sum of money to the person named on it. They are not considered money but the deposits they access are.

Traveler's checks

____________ are also included in the M1 money supply. Travelers buy these checks, usually from a bank, and then use these checks like cash to pay for goods and services.

Near-money

Savings account deposits are considered __________.

M2

Because people's savings are not as liquid as cash, economists put them into a second category known as the ________ money supply.

_______ consists of M1 plus money saved in various kinds of accounts or funds.

Credit card

You can buy a pair of shoes with a __________. Even though people sometimes call this "plastic money," economists do not regard them as a form of money.

Allows the user to buy goods and services with funds borrowed from the bank, store, or other businesses that issued the card.

Credit

___________ is an arrangement that allows a person to buy something now with borrowed money and pay for it later or over time.

Debit card

You can also buy shoes with a _________. A ________ allows you to access the money in your bank account.

Allows the user to access their own funds on deposit in a bank account. Can be used to buy goods and services or to withdraw money directly from an account.

Financial institutions

Banks are __________-- firms that deal mainly with money, as opposed to goods and services.

Saving

The others focused on consumers, encouraging them to embrace the idea of __________--putting money aside for later use.

Financial intermediary

A bank's main function, however is to serve as a __________--an institution that brings together sellers and buyers in financial markets.

Liquidity

As a result, accounts vary in their __________, or the ease with which they can be converted into cash.

Interest

___________ is money paid periodically in return for the use of borrowed funds .

Risk

The ________, or chance of losing money, is very low with any bank deposit, thanks to the Federal Deposit Insurance Corporation.

Commercial loans

Businesses take out __________ to buy machinery, equipment, and materials or to pay labor costs.

consumer loans

Individual borrowers take out _________ to make major purchases such as a new car or boat.

Installment loans

These loans are often called _________, because most are paid back in equal monthly installments, or payments.

Credit history

Before making consumer loan, the bank looks at the individual's _________. This is a history of the person's past borrowing along with his or her record of repaying loans on time and in full.

Mortgage

A _________ is a loan used to buy a house, an office building, land, or other real estate.

Principal

As with any loan, a mortgage is part __________--the amount of money actually borrowed--and part interest on the ________.

The amount of money borrowed, or the amount still owed on a loan, apart from the interest.

Fractional reserve banking

This system--whereby banks keep a fraction of deposits in reserve and make loans with the rest--is known as ________. The system keeps enough money available for withdrawals while allowing banks to profit from the rest.

Check clearing

If you write a check to a store and the store deposits the check into its account with a different back, the Fed takes care of transferring funds from your bank to the store's bank. This process is known as __________.

Personal saving rate

Economists know this by measuring Americans' __________--the proportion of a household's income that its members save each year.

Budget

A _________ is a plan for spending and saving based on one's income and estimated expenses.

Investing

_________ involves using the money you have saved to earn even more money.

Securities

__________ are investments that give their holders the right to receive some form of return, or profit. The most common ones are stocks and bonds.

Compounding

___________ refers to the ability of an investment to generate earnings that can be reinvested to earn still more earnings.

Compound interest

____________ is interest paid not only on the original amount deposited in the savings account, but also on all interest earned by those savings.

Rate of return

___________ is a measure of the change in the value of an investment over time. It is usually expressed as a percentage of value gained or lost in a year.

Rule of 72

To find out, you could use the __________. This rule says to divide the number 72 by the annual rate of return on the investment. The answer is the number of years it will take to double the original investment.

Bond

A __________ is a loan in which the borrower promises to pay the lender a fixed rate of interest over the term of the loan and then repay the principal at the end of the term, or date of maturity.

Yields

Treasury bonds, bills, and notes all offer fairly low ________, or interest rate, but they are considered risk free.

Municipal bonds

Known as ________, these securities are viewed as a bit riskier than Treasury bonds. They attract investors.

Corporate bonds

Because corporations can, and do, go out of business, _________ are riskier to invest in than government bonds.

Junk bonds

Lower-quality bonds are classified high-yield or ____________. The ratings on these bonds range from BB to C. These bonds offer higher potential returns in exchange for a moderately higher risk that the company might fail.

Stocks

___________, in contrast, are securities that represent ownership in a business.

Shareholders

The investors who buy the company's stock become its __________. They own the company.

Dividend

The portion of profits is known as a __________. Investors usually receive this in the form of a dollar amount for each share owned.

Real rate of return

The __________ is the annual percentage return adjusted for the effects of inflation.

Bull markets

These happy times for stock investors are known as __________.

Bear markets

These painful periods for investors are known as ___________.

Brokerage

A ___________ is a company that buys and sells stocks and bonds for investors.

Stockbrokers

Brokerages employ ___________ to help investors make and carry out investment decisions.

Stock market

The actual buying and selling of stocks and bonds takes place in a ___________.

Prospectus

Firms provide such information in a legal document known as a __________. A __________ allows investors to make informed decisions about whether to buy or sell a firm's stock.

Mutual fund

A ___________ is a collection of securities chosen and managed by a group of professional fund managers.

Diversification

Mutual funds are popular with investors as a way of achieving __________. This simply means investing in a wide variety of financial assets.

A method of lowering risk by investing in a wide variety of financial assets.

Market index

A _________ measures changes in the value of a group of stocks, bonds, or other investments from a specific starting point.

Asset allocation

_________ involves dividing the assets in a person's portfolio among different types of investment.