Unit 4: Financial Sectors

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when listing in answer use commas instead of "and" // not included: fisher effect // NO OWNER EQUITY ON TEST

61 Terms

1

private savings

the total sum of domestic savings by households

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2

disposable income * MPS

formula for private savings

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3

tax revenue - government expenditures - transfer payments

formula for public savings (budget balance)

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4

budget defict

when government expenditures and transfers exceeds tax revenues - gov needs to issue bonds to borrow in order to pay for a portion of its spending - budget balance is negative

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5

budget surplus

when tax revenues exceed government expenditures and transfers allowing the government can lower its long-term debt - budget balance is positive

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6

balanced budget

when tax revenues equal government expenditures exactly

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7

government debt

the sum of the budget balances over the years

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8

foreign capital inflow - domestic fund outflow

formula for net capital inflow

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9

foreign capital inflow

when a foreigner saves in theĀ US via treasury bonds, stocks, etc

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10

domestic funds outflow

when a domestic household saves in a foreign market via stocks, government bonds, etc.

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11

investment, government

a nations total level of savings = _______ spending for ______

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12

private savings + budget balance + net capital inflows

national savings formula

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13

interest rate

the price of a loan stated as a percent of the principal (the amount borrowed)

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14

credit risk

how likely the borrower (in a loan) is to default

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15

default

to not pay back a loan

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16

expected inflation

the higher inflation is expected to be, the higher the interest rate

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17

nominal interest rate

interest rate paid on a loan

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18

real interest rate

nominal interest rate adjusted to account for changing price levels

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19

nominal interest rate - inflation rate

formula for real interest rate

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20

inflation, raises

borrowers like _______ because it _____the real interest rate

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21

deflation, lowers

lenders like _____ because it ______ real rate of interest, giving more power to the dollar

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22

loanable funds market

a hypothetical market that brings together those who want to lend money and those who want to borrow

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23

changes in perceived business opportunities, changes in government borrowing

shifters of demand for loanable funds (2)

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24

savers

______ supply loanable funds to earn interest (like a higher interest rate)

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25

changes in private savings behavior, changes in capital inflows

shifters of supply of loanable funds

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26

households, foreigners

who supplies funds?

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27

firms, government

who demands funds?

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28

banks

a financial institution that accepts deposits and makes loans; also known as depository institutions and commercial banks

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29

fractional reserve system

a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal

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30

federal reserve

our nationā€™s central bank - regulates commercial banks by distributing loans and receiving deposits and selling/purchasing treasury bonds

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31

required reserve ratio

a minimum percentage of all deposits that banks must keep on hand to meet their depositorā€™s demands

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32

monetary policy

tool the Fed uses to control the money supply of the US to either reduce the price level in an inflationary period or increase employment in a recessionary period

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33

T-account

a method for analyzing a businessā€™ assets and liabilities

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34

assets

a future economic payment (money promised to the bank in the future)

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35

liability

a future economic obligation (money the bank must pay out in the future)

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36

equal

assets must _____ liabilities

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37

deposits

money that customers put into their bank account

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38

required reserves

a percentage/portion of customer deposits that banks are legally obligated to keep on hand by the Fed

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39

excess reserves

reserves that are above the required reserve ratio that a bank can lend out or use to purchase treasury bonds

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40

treasury bond

government bonds with a term under a year - these can be purchased by banks using excess reserves to earn interest from the Fed

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41

owner equity

money (profit) owed to the owners of the bank (shareholders) - if bank collects interest when loans are repaid, that interest is added to this and excess reserves

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42

money supply

total amount of money in circulation or in existence in a country

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43

M1

the broadest definition of money supply (money that includes all currency) cash, coins, deposits in checking accounts, and travelers checks

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44

the Fed

the sole controller of the American money supply

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45

cash, new money

when you put ______ into a checking account you can create ____ _______ and increase M1

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46

1/reserve requirement

money multiplier formula

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47

cash, flexible

when interest rate is lower, people are more likely to hold their wealth as _____ because it is more ______

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48

theory of liquidity preference

theory that states that equilibrium interest rate determined by the supply and demand of money

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49

aggregate price level, RGDP, income, technology, institutions

shifters of money demand (change inā€¦ā€” 5)

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50

federal reserve, monetary policy

shifters of money supply (2)

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51

President

the Board of Governors and Chairperson in the Federal Reserve are chosen by the _________

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52

full employment, price stability

what is the dual mandate for the federal reserve board of governors ?

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53

federal funds rate

rate at which commercial banks lend to each other but affects all other interest rate

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54

unemployment

in expansionary monetary policy, the Fed is targeting ___________

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55

inflation

in contractionary monetary policy, the Fed is targeting __________

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56

open market operations

when the Fed buys or sells T-Bills to its' member commercial banks

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57

open market purchase

Fed is buying T-Bill from a commercial bank

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58

discount rate

the interest rate set by the Federal Reserve for lending to other banks

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59

discount rate, interest on reserves, required reserve ratio

other monetary tools the Fed can use (3)

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60

liquidity trap

Ā a scenario in which the central bank adds money into the market with the goal of stimulating the economy, but fails to lower the interest rates because the interest rate is already reaching or is zero

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61

interest on reserves

Ā when commercial banks can deposit reserves ($) in the Fed and earn interest

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