Econ

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Financial Intermediaries

Back 1

Are firms that provide funds for business investment using funds raised from saving

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Banking Crisis

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Occur when the asset values of banks fall far below what is owed to depositors

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Coupon Rate

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is the percentage of the principal that must be paid to the bondholder in a given time period

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Bond Market

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is the set of all actual and potential buyers and sellers of bonds

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Dividends

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Periodic payments from a company's profit

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Capital Gains

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if the value of the stock increases

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Risk Premium

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is the rate of return required by investors of a risky asset minus the rate of return on a safe asset

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Diversification

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is spreading one's wealth over a variety of financial assets to reduce risk

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Recession

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is a period in which the economy is growing at a slower rate than normal rate

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Depression

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Is a severe recession

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Peak

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is the high point of the business cycl, the period when the growth rate returns negative

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Trough

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is the low-point of the business cycle, the period when the growth rate returns positve

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Taming Recessions

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government polocies applied to reduce negativegrowth rates and shorten the time between the peak and trough

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Potential Output Y*

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the maximum sustainable amount of real GDP that an economy can produce

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Output gap

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is the difference between potential output and actual output at a point in time

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Recessionary Gap

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negative output gap Y*>Y

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Expansionary Gap

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positive output gap Y*<Y

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natural rate of employment

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is the sum of frictional and structural unemployment

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Okun's Law

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relates cynical unemployment changes to changes in output gap

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John Maynard Keynes

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British economist who first described a theory explaining recessions

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PAE (Planned Aggregate Expenditure)

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is planned spending on goods and services

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Consumption Function

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is an equation relating planned consumption spending to disposable income

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MPC (mariginal propensity to consume)

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is the average amount to spent out of every dollar of disposable income, determines the slope of the consumption function

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wealth effect

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is the tendency of changes in asset prices to affect houselholds' wealth and consumption spending

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Short-run equilibrium

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is the level of output at which planned spending is equal to output

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income-expenditure multiplier

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is the ratio of the drop in output to the drop in spending

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Stabilization policy

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are governments actions to affect planned spending with the intention of eliminating output gaps

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exapnsionary policy

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increased planned spending

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contractionary policy

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decreased planned spending

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fiscal policy

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uses changes in government spending, transfers, or taxes

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monetary policy

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uses changes in the money supply

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Federal Open Market committee

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reviews economic conditions and sets monetary policy

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demand for money

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is the desired amount of wealth held in the form of money