Unit 4: Financial Sector (copy)

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.

Nominal interest rate

The stated interest rate on a loan or financial product without adjustment for inflation.

Real interest rate

The nominal interest rate adjusted for inflation.

Fiat Money

The paper and coin money used today, which has no intrinsic value but is backed by the government's trust.

Commodity Money

Money that has intrinsic value or has an alternative use besides being a medium of exchange.

Medium of exchange

One of the functions of money, facilitating transactions between buyers and sellers.

Unit of account

The function of money that provides a standard measure of value.

Store of value

The function of money that allows it to be saved and retrieved in the future.

Money supply

The total amount of monetary assets available in an economy at a specific time.

Fractional reserve banking

A banking system where only a fraction of bank deposits are held in reserve as cash.

Reserve ratio

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

Money multiplier

The maximum amount of new checking deposits that can be created by a single dollar of excess reserves.

Transaction demand

The amount of money held for day-to-day transactions, which does not vary with interest rates.

Asset demand

The amount of money demanded as an investment asset, negatively correlated with interest rates.

Open market operations

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

Expansionary monetary policy

A policy designed to increase the money supply and lower interest rates to stimulate the economy.

Contractionary monetary policy

A policy that aims to decrease the money supply and raise interest rates to combat inflation.

Federal funds rate

The interest rate charged by banks for overnight loans to other banks.

Loanable funds market

The market where borrowers like businesses and government seek loans and lenders seek to provide loans.