Modern Principles of Economics - Saving, Investment, and the Financial System

This set of flashcards covers key vocabulary from the principles of savings, investment, and the financial system, focusing on definitions, roles of financial intermediaries, and concepts critical for understanding economic growth and market dynamics.

Saving

Income that is not spent on consumption goods.

Investment

The purchase of new capital goods.

Smoothing Consumption

The practice of saving during working years and dissaving during retirement years to maintain a stable consumption level.

Impatience

A preference for consuming now rather than later, impacting a person's savings rate.

Time Preference

The varying desire for consuming now rather than in the future.

Market for Loanable Funds

Occurs when suppliers (savers) trade with demanders (borrowers), determining the equilibrium interest rate.

Equilibrium in the Market for Loanable Funds

Occurs when the quantity of funds supplied equals the quantity of funds demanded, with interest rates adjusting accordingly.

Financial Intermediaries

Entities such as banks and stock markets that reduce the costs of moving savings from savers to borrowers and investors.

Crowding Out

The decrease in private consumption and investment that occurs when government borrows more.

Arbitrage

The buying and selling of equally risky assets to ensure they earn equal returns.

Securitization

The process of bundling mortgage loans and selling them as financial assets.

Shadow Banking

A system of financial institutions that operate outside traditional banking regulations.

Leverage Ratio

The ratio of debt to equity, showing the level of a company's debt relative to its net worth.

Owner Equity

The value of an asset minus the debt owed on it.

Bond

A corporate IOU that lists how much is owed, the interest rate, and when payment is due.

Stock

A certificate of ownership in a corporation, also called a share.