Chapter 13: Saving, Investing, and Financial Institutions

This set of flashcards covers key terms and concepts related to saving, investing, and the role of financial institutions as discussed in Chapter 13.

Saving

The money that you have left over that you did not consume.

Investment

Buying capital (physical or human) to produce more goods. (Not the putchase of stocks and bonds

Financial Institutions

Groups that are in control of connect savers with investors. Financial markert, financial intermediary

Financial Markets

Places where savers directly lend to borrowers. EX- The Bond Market , Stock market.

Financial Intermediaries

Middlemen that connect savers with investors indirectly. EX- bank , mutual fund

Private Saving

Saving by households . = Y(GDP)-T(taxes)-(Consumption)

Public Saving

Government savings. = T (taxes) - G (government spending)

National Saving

private saving + public saving.= (Y-T-C) +  (T - G ) , T canels out = Y-C-G

Equilibrium Quantity of Loanable Funds

The point where the supply of savings matches the demand for investment loans.

Crowding Out

Increased budget deficit makes GOV borrowing and that reduces private investment

Debt-to-GDP Ratio

A nation's government debt compared to its total economic GDP.

budget surplus , budget deficit

Budget deficit is when saving/supply is less than spending cuase inter rate to increase and supply decreased

increase in intrest rate cuases su[pply to

Increase

A decrease in interest rate cuases demand to 

increase as borrowing becomes cheaper.

tax incentives for savinf causes

supply willl increase

an investment tax credit

increases demand because it reduces the after-tax cost of investments

Medium of exchange - 

Unit of account- 

Store of value-

Medium of exchange - anything that is accepted as a means of payment.

Unit of account - a unit of measure that provides a consistent measure of value.

Store of value - an item used to grow value over time purchases.

commodity money

Fiat money

• Commodity money: a type of currency that is backed by a physical commodity, such as gold or silver.

• Fiat money: currency that has no intrinsic value and is not backed by physical commodities but is our money cuz they say

money supply is the quantity of money in ecmonomy.

What assets should be part of money supply?

Currency- paper bills and coins in hands of public

Demand deposits - Balances in bank acccounts depositors can access on demnad 

Measures of US money Supply

M1(more liquid)- currency demand deposits, travlers check. 

M2-  M1,  plus savings depositsFe and other near-money assets.

Federal Reserve system

How many board members, how many regional fed banks , whats monetary policy ?

The Federal Reserve System is the central banking system of the United States,

consisting of seven members and twelve regional Federal Reserve Banks. 

monetary policy is the process by which the Federal Reserve manages the money supply and interest rates

What does the Fed

lareg banks have accounts with the Fed

lender of last resort

Regulate money supply (M1,M2)

Bank reserve 

The portion of deposits that banks must hold in reserve and not lend out, ensuring liquidity and stability in the banking system.

FED makes reserve re quirements that banks must follow.

Money Multiplier 

1/Reserve requirement ratio 

The Federal Funds rate

is the interest rate at which banks lend reserves to each other overnight. It influences overall economic activity and monetary policy. lowering supply

P=? , 1/P=?

P= the price level , P is the price of a basket

1/P = The value of money or purchasing power. (If basket contains 1 candy bar and  P=$2, Vaule of $1 is ½ candy bar

Inflation drives up and Drives down "_

Drives up price and drives down value of money 

quanity theroey of moey

claims that the amount of money determines the value 

an increase in P will cuase the value of money to

Decrease

when the value of money rises , price levels _

real vs nominal variavles

Nominal varibles are things that are measures in money

Real varibles are in physcial units

A Relative Price 

is the price of a good or service compared to another . EX- $15cd / $10pizza =1.5 pizza per CD. - measuered in physcial unit so they are real varibles

T or F  if FED Doubles the MS all nominal variables will double but all real varibles will stay the same 

True

Money Neutrality

The proposition that changes in MS doesnt changed real varibles

The velocity of money

The rate money changed hands.

V= P x Y / M

P(price level) .Y(Real GDP), M (money supply). V=Velocity

The Quantity equation

An equation that describes the relationship between the money supply, velocity of money, price level, and real GDP, typically expressed as MV = PY. =when M increases , P increases

Hyperinflation

is an extremely high and typically accelerating rate of inflation, often exceeding 50% per month,

Inflation tax

When Gov ability to burrow is limited they may start printing money cuasing inflation on money

The Fisher Effect

Nominal Inflation rate = Inflation rate + real Inflation rate

Change in money growth effects inflation rate not real inflation rate . so nominal interest rate adjust one dor one w changes on inflation rate

increase in inflation gives u more money , are you more wealthyier now?

NO

Cost of inflatiom

Shoeleather cost - the resources wasted when consumers reduce their money holdings to avoid inflation.

Menu cost - the costs associated with changing prices in response to inflation.

Misallocation of resources from relative price variability - frims dont alwys raise prices at the same time

Confusion- Inflationss changes our yardstick we meaure transactions

Tax distorions - inflation makes nominal income grow faster than real. causeing people to pay more taxes