Economics Chapter 10 and 11 Key Terms

debtors

or borrowers, are economic agents who borrow funds

credit

the loans the debtor recieves

interest rate or nominal interest rate

the annual cost of a $1 loan, so i x L is the annual cost of an $L loan

real interest rate

the nominal interest rate minus the inflation rate

credit demand curve

the schedule that reports the relationship between the quantity of credit demanded and the real interest rate

credit supply curve

the schedule that reports the relationship between the quantity of credit supplied and the real interest rate

credit market

where borrowers obtain funds from savers

financial intermediaries

channel funds from suppliers of financial capital to users of financial capitals

securities

financial contracts

bank reserves

consist of vault cash and reserves held at the Federal Reserve Bank

demand deposits

funds that depositors can access on demand by withdrawing money from the bank, writing checks, or using their debit cards

stockholders’ equity

the difference between a bank’s total assets and its total liabilities

maturity

the time until debt must be repaid

maturity transformation

the process by which banks take short-maturity liabilities and invest in long-maturity assets (long-term investments)

insolvent

bank becomes _____ when the value of the bank’s assets is less than the value of its liabilities

solvent

bank is _____ when the value of the bank’s assets is greater than the value of its liabilities

bank run

occurs when a bank experiences an extraordinarily large volume of withdrawals driven by a concern that the bank will run out of liquid assets with which to pay withdrawals

money

the asset that people use to make and recieve payments when buying and selling goods and services

medium of exchange

an asset that can be traded for goods and services

store of value

an asset that enables people to transfer purchasing power into the future

unit of account

a universal yardstick that is used for expressing the worth (price) of different goods and services

fiat money

refers to something that is used as legal tender by the government decree and is not backed by a physical commodity like gold and silver

money supply

adds together currency in circulation, checking accounts, savings accounts, travelers’ checks, and money market accounts

quantity theory of money

assumes that the growth rate of the money supply and the growth rate of nominal GDP are the same ocer the long run

deflation

the rate of decrease of a price index

seigniorage

Government revenue obtained from printing currency

real wage

the nominal wage divided by a price index, like the Consumer Price Index (CPI)

central bank

the government institution that monitors financial institutions, controls certain key interest rates, and indirectly controls the money supply

monetary policy

constitues

Federal Reserve Bank, or the Fed

the name of the central bank in the United States

liquidity

funds available for immediate payment

federal funds market

refers to the market where banks obtain overnight loans of reserves from one another

interest on reserves (IOR)

private banks that hold reserves at the Fed, including reserves that they have borrowed, are paid interest on those hold reserves

federal funds market equilibrium

the point where the supplu and demand curves cross in the federal funds market

open market operations

if the Fed wishes to increase the level of reserves that private banks hold, it offers to buy government bonds from the private banks, and in return it gives the private banks more electronic reserves. if the Fed wishes to decrease the level of reserves, it offers to sell government bonds to the private banks and in return the private banks give back some pf their rserves, By buying or selling government bonds, the Fed shifts the vertical supply curve in the federal funds market and therby controls the level of reserves.

long-term real interest rate

the long-term nominal interest rate minus the long-term inflation rate

realized real interest rate

the nominal interest rate minus the realized rate of inflation

expected real interest rate

the niminal interest rate minus the expected rate of inflation

inflation expectation

economic agents’ inflation expectations are their beliefs about furture inflations rate