U5

Interest Rate

Price calculated as % of amount borrowed charged by lenders to borrowers for the use of their savings for 1 year

Savings

Investment spending quantity

Budget Surplus

Difference between tax revenue (TR) & government spending (GS) when TR > GS

Budget Deficit

Difference between TR & GS when GS > TR

Budget Balance

Difference between TR & GS

National Savings

the sum of private savings and the budget balance, is the total amount of savings generated within the economy

Capital Inflow

the total inflow of foreign funds minus the total outflow of domestic funds to other countries

Investment Spending

National Savings + Capital Inflow

Financial Markets

where households invest their current savings and their accumulated savings by purchasing financial assets

Financial Assets

Paper claim entitling buyer to future income from seller

Physical Asset

Claim on tangible object that gives the owner the right to dispose of the object as he/she wishes

Liability

a requirement to pay money in the future

3 Tasks of a Financial System

1. Reducing Transaction Costs

2. Reducing Risk

3. Providing Liquidity

Transaction Costs

the expenses of negotiating and executing a deal

Financial Risk

uncertainty about future outcomes that involves financial gains and losses

Liquid Asset

can be quickly converted into cash without much loss of value

Loan

a lending agreement between an individual lender and an individual borrower

Bond

IOU issued by borrower

Stock

A share of ownership in a corporation.

Financial Intermediary

an institution that transforms the funds it gathers from many individuals into financial assets

Bank

a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investment spending needs of borrowers

Bank Deposit

a claim on a bank that obliges the bank to give the depositor his/her cash when demanded