Unit 4: Financial Sector

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51 Terms

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T account
________ or balance sheet- A tabular way to show the assets and liabilities of a bank.
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Debt financing
________- A firms way of raising investment funds by issuing bonds to the public.
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Federal Reserve
The ________ has three general tools of monetary policy that they control:
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Equity
________ financing- The firms method of raising funds for investment by issuing shares of stock to the public.
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barter economy
In a(n) ________, the value of a pound of cheese would equal a dozen eggs.
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Reserve cash
________ is an asset and so are loans made to citizens.
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money supply
When the ________ is decreased, the interest rate increases causing a decrease in private consumption and investment shifting AD to the left.
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inverse relation
There is a(n) ________ between the nominal interest rate and the quantity of investment demanded.
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actual gains
The chance that an outcome or an investments ________ differ from the expected outcome.
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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.
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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.
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Preference
________ is given to investments with a higher rate of return.
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quantity of credit
It is the ________ wanted and needed at every real interest rate by borrowers in an economy.
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Money multiplier
________- This measures the maximum amount of new checking deposits that can be created by a single dollar of excess reserves.
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supply of loanable funds
When the ________ decreases then the real interest rate will increase.
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monetary base of a nation
The ________ is determined by the countrys central bank (FED)
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Bonds
________ pay fixed interest rates, as interest rates fall, the price rises.
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reserve ratio
Increasing the ________ decreases excess reserves in commercial banks and contracts the money supply.
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loanable funds
When the demand for ________ increases then the real interest rate will increase.
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Monetary base
________= currency in circulation + bank reserves.
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Most liquid asset
Cash
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Stock
A certificate that represents a claim to, or share of the ownership of a firm
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Equity financing
The firms method of raising funds for investment by issuing shares of stock to the public
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Bond
A certificate of indebtedness from the issuer to the bondholder
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Debt financing
A firms way of raising investment funds by issuing bonds to the public
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Real interest rate = nominal interest rate
inflation
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Fiat Money
The paper and coin money used today
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Commodity Money
It is something that performs the function of money and has an alternative, non-monetary use
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Functions of money
Money serves three functions
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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
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Unit of account
Units of currency measure the relative worth of goods and services
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Store of value
Money is a relatively good way to store value, when theres no inflation because it keeps its value
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Money supply
The quantity of money in circulation as measured by the Federal Reserve (the Fed) as M1 and M2
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Liquidity
A measure of how easily an asset can be converted to cash
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Fractional reserve banking
A system in which only a fraction of the total money deposited in banks is held in reserve as currency
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Reserve ratio (rr)
The fraction of a banks total deposits that are kept on reserve
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Reserve requirement
Regulation set by the Fed that states the minimum reserve ratio for banks
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Excess reserves
The cash reserves held by banks above and beyond the minimum reserve requirement
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T-account or balance sheet
A tabular way to show the assets and liabilities of a bank
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Asset of a bank
Anything owned by the bank or owed to the bank is an asset of the bank
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Liability of a bank
Anything owned by depositors or lenders is a liability to the bank
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Money multiplier
This measures the maximum amount of new checking deposits that can be created by a single dollar of excess reserves
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Transaction demand
The amount of money held in order to transactions
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Asset demand
The amount of money demanded as an asset
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Total demand
Plotted against the nominal interest rate, the transaction demand for money is a constant MDt
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Money demand
The demand for money is the sum of money demanded transactions and money demanded as an asset
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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
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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
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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
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Federal funds rate
The interest rate paid on short-term loans made from one bank to another
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Discount rate
The interest rate commercial banks pay on short-term loans from the Fed