Unit 4: Financial Sectors

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

private savings

the total sum of domestic savings by households

disposable income * MPS

formula for private savings

tax revenue - government expenditures - transfer payments

formula for public savings (budget balance)

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

budget surplus

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

balanced budget

when tax revenues equal government expenditures exactly

government debt

the sum of the budget balances over the years

foreign capital inflow - domestic fund outflow

formula for net capital inflow

foreign capital inflow

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

domestic funds outflow

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

investment, government

a nations total level of savings = _______ spending for ______

private savings + budget balance + net capital inflows

national savings formula

interest rate

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

credit risk

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

default

to not pay back a loan

expected inflation

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

nominal interest rate

interest rate paid on a loan

real interest rate

nominal interest rate adjusted to account for changing price levels

nominal interest rate - inflation rate

formula for real interest rate

inflation, raises

borrowers like _______ because it _____the real interest rate

deflation, lowers

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

loanable funds market

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

changes in perceived business opportunities, changes in government borrowing

shifters of demand for loanable funds (2)

savers

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

changes in private savings behavior, changes in capital inflows

shifters of supply of loanable funds

households, foreigners

who supplies funds?

firms, government

who demands funds?

banks

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

fractional reserve system

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

federal reserve

our nation’s central bank - regulates commercial banks by distributing loans and receiving deposits and selling/purchasing treasury bonds

required reserve ratio

a minimum percentage of all deposits that banks must keep on hand to meet their depositor’s demands

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

T-account

a method for analyzing a business’ assets and liabilities

assets

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

liability

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

equal

assets must _____ liabilities

deposits

money that customers put into their bank account

required reserves

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

excess reserves

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

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

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

money supply

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

M1

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

the Fed

the sole controller of the American money supply

cash, new money

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

1/reserve requirement

money multiplier formula

cash, flexible

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

theory of liquidity preference

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

aggregate price level, RGDP, income, technology, institutions

shifters of money demand (change in…— 5)

federal reserve, monetary policy

shifters of money supply (2)

President

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

full employment, price stability

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

federal funds rate

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

unemployment

in expansionary monetary policy, the Fed is targeting ___________

inflation

in contractionary monetary policy, the Fed is targeting __________

open market operations

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

open market purchase

Fed is buying T-Bill from a commercial bank

discount rate

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

discount rate, interest on reserves, required reserve ratio

other monetary tools the Fed can use (3)

liquidity trap

 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

interest on reserves

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