Unit 4: Financial Sector

T account

T account

________ or balance sheet- A tabular way to show the assets and liabilities of a bank.

Debt financing

________- A firms way of raising investment funds by issuing bonds to the public.

Federal Reserve

The ________ has three general tools of monetary policy that they control:

Equity

________ financing- The firms method of raising funds for investment by issuing shares of stock to the public.

barter economy

In a(n) ________, the value of a pound of cheese would equal a dozen eggs.

Reserve cash

________ is an asset and so are loans made to citizens.

money supply

When the ________ is decreased, the interest rate increases causing a decrease in private consumption and investment shifting AD to the left.

inverse relation

There is a(n) ________ between the nominal interest rate and the quantity of investment demanded.

actual gains

The chance that an outcome or an investments ________ differ from the expected outcome.

Expansionary monetary policy

________- Designed to fix a recession by lowering interest rates to increase aggregate demand, lower the unemployment rate, and increase real GDP, which may increase the price level.

Contractionary monetary policy

________- Designed to avoid inflation by increasing interest rates to decrease aggregate demand, which lowers the price level and decreases real GDP back to full employment.

Preference

________ is given to investments with a higher rate of return.

quantity of credit

It is the ________ wanted and needed at every real interest rate by borrowers in an economy.

Money multiplier

________- This measures the maximum amount of new checking deposits that can be created by a single dollar of excess reserves.

supply of loanable funds

When the ________ decreases then the real interest rate will increase.

monetary base of a nation

The ________ is determined by the countrys central bank (FED)

Bonds

________ pay fixed interest rates, as interest rates fall, the price rises.

reserve ratio

Increasing the ________ decreases excess reserves in commercial banks and contracts the money supply.

loanable funds

When the demand for ________ increases then the real interest rate will increase.

Monetary base

________= currency in circulation + bank reserves.

Most liquid asset

Cash

Stock

A certificate that represents a claim to, or share of the ownership of a firm

Equity financing

The firms 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 firms way of raising investment funds by issuing bonds to the public

Real interest rate = nominal interest rate

inflation

Fiat Money

The paper and coin money used today

Commodity Money

It is something that performs the function of money and has an alternative, non-monetary use

Functions of money

Money serves three functions

Medium of exchange

It follows the logic that your labor hours turn into money, the money turns into apples, the farmer then exchanges the money for an orchards apple crop, and so on

Unit of account

Units of currency measure the relative worth of goods and services

Store of value

Money is a relatively good way to store value, when theres no inflation because it keeps its value

Money supply

The quantity of money in circulation as measured by the Federal Reserve (the Fed) as M1 and M2

Liquidity

A measure of how easily an asset can be converted to cash

Fractional reserve banking

A system in which only a fraction of the total money deposited in banks is held in reserve as currency

Reserve ratio (rr)

The fraction of a banks total deposits that are kept on reserve

Reserve requirement

Regulation set by the Fed that states the minimum reserve ratio for banks

Excess reserves

The cash reserves held by banks above and beyond the minimum reserve requirement

T-account or balance sheet

A tabular way to show the assets and liabilities of a bank

Asset of a bank

Anything owned by the bank or owed to the bank is an asset of the bank

Liability of a bank

Anything owned by depositors or lenders is a liability to the bank

Money multiplier

This measures 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 in order to transactions

Asset demand

The amount of money demanded as an asset

Total demand

Plotted against the nominal interest rate, the transaction demand for money is a constant MDt

Money demand

The demand for money is the sum of money demanded transactions and money demanded as an asset

Expansionary monetary policy

Designed to fix a recession by lowering interest rates to increase aggregate demand, lower the unemployment rate, and increase real GDP, which may increase the price level

Contractionary monetary policy

Designed to avoid inflation by increasing interest rates to decrease aggregate demand, which lowers the price level and decreases real GDP back to full employment

Open market operations (OMOs)

A traditional tool of monetary policy, it involves the Feds buying (or selling) of securities from (to) commercial banks and the general public

Federal funds rate

The interest rate paid on short-term loans made from one bank to another

Discount rate

The interest rate commercial banks pay on short-term loans from the Fed