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154 Cards in this Set
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the group of institutions in the economy that help to match one person's savings with another person's investment
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financial system
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financial institutions through which savers can directly provide funds to borrowers
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financial markets
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a certificate of indebtedness
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bond
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a claim to partial ownership in a firm
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stock
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financial institutions through which savers can indirectly provide funds to borrowers
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financial indermediaries
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an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds
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mutual fund
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the total income in the economy that remains after paying for consumption and government purchases
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national saving
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the income that households have left after paying for taxes and consumption
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private saving
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the tax revenue that the government has left after paying for its spending
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public saving
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an excess of tax revenue over government spending
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budget surplus
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a shortfall of tax revenue from government spending
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budget deficit
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the market in which those who want to save supply funds and those who want to borrown to invest demand funds
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market for loanable funds
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a decrease in investment that results from government borrowing
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crowding out
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financial institutions can be grouped into these two categories
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financial markets and financial intermediaries
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the two most important financial markets in our economy
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the bond market and the stock market
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a bond identifies the time at which the loan will be repaid called...
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date of maturity
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the buyer of a bond gives money in exchange for a promise of interest and eventual repayment of the amount borrowed
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principle
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the length of time until the bond matures
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bond's term
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a bond that never matures and pays interest forever.. but the principle is never repaid
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perpetuity
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which are riskier? short term bond or long term bonds? and why?
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long term bonds because holders of long term bonds have to wait londer for repayment of principle.. to compensate long term bonds usually pay higher interest rates than short term bonds
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the probability that the borrower will fail to pay some of the interest or principle
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bond's credit risk
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the failure to pay some of the interest or principle
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default... some people default by declaring bankrupcy
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financially shaky corporations raise money by using these... (________) which pay very high interest rates
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junk bonds
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the way the tax laws treat the interest earned on the bond
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taz treatment
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when state and local governments issue bonds and the bond owners are not required to pay federal income tax on the interest income
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municipal bonds
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the sale of stock to raise money
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equity finance
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the sale of bonds
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debt finance
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the owner of sharesof Intel stock is..
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a part owner of Intel
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the owner of an Intel bond is...
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a creditor of the corporation
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an average of a group of stock prices
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stock index
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what are two of the most important financial intermediaries
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banks and mutual funds
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an item that people can easily use to engage in transcations
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medium of exchange
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how various numbers are defined and added up
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accounting
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an equation that must be true because of the way the variables in the equation are defined
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identity
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GDP is divided into four components of expidenture
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consumption, investment, government purchases, and net exports
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an economy that doesnt interact ith other economies, in particular it does not engage in international trade in goods and services nor in international borrowing and lending
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closed economy
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actual economies, they interact with other economies around the world
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open economy
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saving equals
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investment
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all income that people have chosen to save and lend out, rather than use for their own consumption
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loanable funds
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the interest rate as usually reported-- the monetary return in saving and the monetary cost of borrowing
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nominal interest rate
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the nominal interest rate corrected for inflation; it equals the nominal rate minus the inflation rate
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real interest rate
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if a reform of the tax laws encouraged greater investment the result would be...
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higher interest rates and greater saving
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an excess of government spending over tax revenue
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budget deficit
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the accumulation of past government borrowing
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government debt
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an excess of tax revenue over government spending, can be used to repay some government debt
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budget surplus
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when the government spending exactly equals tax revnue
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balanced budget
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when the government reduces national saving by running a budget deficit...
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the interest rate rises and the investment falls
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increases the supply of loanable funds, reduces the interest rate, and stimulates investment
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budget surplus
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the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk
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finace
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the amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money
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present value
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the amount of money in the future that an amount of money today will yield, given prevailing interest rates
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future value
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the accumulation of a sun of money in, say, a bank account, where the interest earned remains in the accountto earn additional interest in the future
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compunding
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a dislike of uncertainty
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risk aversion
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the reduction of risk achieved by replacing a single risk with a large number of smaller unrelated risks
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diversification
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risk that affets only a single company
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firm-specific risk
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risk that affects all compaines in the stock market
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market risk
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the study of a company's accounting staements and future prospects to determine its value
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fundamental analysis
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the theory that asset prices reflect all publicly available information about the value of an asset
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efficient markets hypothesis
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the description of asset prices that rationally reflect all available information
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information efficiency
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the path of a variable whose changes are impossible to predict
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random walk
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the process of finding a present value of a future sum of money
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discounting
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a persons subjective measure of wellbeing or satisfaction
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concept of utility
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the more wealth a person has, the less utility he gets from an additional dollar
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property of diminishing utility
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a regular income every year until you die
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annuity
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a high risk person is more likely to apply for insurance than a low risk person because i a high risk person would benefit more from insurance protection
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adverse selection
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after people buy insurance, they have less incentive to be carfeu because the insurance company will cover much of the resulting losses
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moral hazard
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measures the volatility of a variable-- how much the variable is likely to fluctuate
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standard deviation.. the higher the standard of deviation of a portfolio's return the riskier it is
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have an average return of 8 percent and the standard deviation of 20 percent
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risky stocks
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have a return of 3 percent and a standard deviation of 0
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safe alternatives
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if the price of the stock is less than the value
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undervalued
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if the price of the stock is more than the value
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overvalued
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it the price of the stock and the value are equal
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fairly valued
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when choosing stocks for your portfolio, should you choose undervalued, overvalued, or fairly valued stocks? why?
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undervalued stocks because you are getting a bargain by paying less than the business is worth
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cash payments that a company makes to ist shareholders
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dividends
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a mutual fund that buys all the stocks in a given stock index
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index fund
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the total number of orkers, including both the employed and the unemployed
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labor force
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the percentage of the labor force that is unemployed
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unemployment rate
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the percentage of the adult population that is in the labor force
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labor-force participation
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the normal rate of unemployment around which the unemployment rate fluctuates
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natural rate of unemployment
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the deviation of unemployment from its natural rate
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cyclical unemployment
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individuals who would like to work but have given up looking for a job
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discouraged workers
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unemployment that results because it takes time for workers to search for jobs that best suit their tastes and skills
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frictional unemployment
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unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
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structural unemployment
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the process by hich workers find appropriate jobs given their tastes and skills
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job search
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a government program that partially protects workers' incomes when they become unemployed
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unemployment insurance
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a worker association that bargains with employers over wages, benefits, and working conditions
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union
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the process by which unions and firms agree on the terms of employment
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collective bargaining
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the organized withdrawl of labor from a firm by a union
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strike
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above-equilibrium wages paid by firms to increase worker productivity
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efficiency wages
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the amount of unemployment that the economy normally experiences
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natural rate of unemployment
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the year-to-year fluctations in unemployment around its natural rate, and it is closely associated with the short-run ups and dons of economic activity
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cyclical unemployment
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this category includes those who orked as paid employees, worked in their own business, or worked as unpaid workers in a family member's business
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employed
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this category includes those who were not employed, were available for work, and had tried to find employment during the previous 4 weeks
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unemployed
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this category includes those who fit neither of the first two categories, such as full time student, homemaker, or retiree
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not in the labor force
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Labor force equals?
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number of employed + number of unemployed
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unemployment rate equals?
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number of employed/ Labor force x 100
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labor-force participation rate?
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labor force/ adult population x 100
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changes in the composition of demand among industries or regions
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sectoral shifts
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the set of assets in an economy that people regularly use to buy goods and services from other people
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money
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an item that buyers give to sellers when they want to purchase goods and services
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medium of exchange
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the yardstick people use to post prices and record debts
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unit of account
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the ease with which an asset can be converted into the economy's medium of exchange
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liquidity
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an item that people can use to transfer purchasing power from the present to the future
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store of value
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money that takes the form of a commodity with intrinsic value
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commodity money
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money without the intrinsic value that is used as money because of government decree
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flat money
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Fed0the public
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currency
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balances in bank accounts that depositors can access on demand by writing a check
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demand deposits
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the central bank of the United States
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Federal Reserve (Fed)
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an institution designed to oversee the banking system and regulate the quantity of money in the economy
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central bank
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the quantity of money available in the economy
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money supply
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the setting of the money supply by policy makers in the central bank
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monetary policy
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deposits that banks have recieved but have not loaned out
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reserves
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a banking system in which banks hold only a fraction of deposits as reserves
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fractional-reserve banking
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the fraction of deposits that banks hold as reserves
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reserve ratio
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the amount of money the banking system generates with each dollar of reserves
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money multiplier
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the purchase and sale of U.S. government bonds by the Fed
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open-market operations
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regulations on the minimum amount of reserves that banks must hold against deposits
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reserve requirements
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the interest rate on the loans that the Fed makes to banks
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discount rate
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the unlikely occurance that two people each have a good or service that the other wants
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coincidence of wants
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the item would have value even if it werent used as money
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intrinsic value
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when an economy uses gold as money (or uses paper money that is convertible into gold on demand)
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gold standard
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the quantity of money circulating in the economy
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money stock
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the purchase and sale of U.S. government bonds
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open-market operation
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an open market purchase of bonds by the Fed
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increases the money supply
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an open market sale of bons by the Fed
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decreases money supply
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a minimum amount of reserves that a bank must hold
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reserve requirement
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banks may hold reserves above the legal minimum
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excess reserves
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what determines the size of teh money multiplier
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the money multiplier is the reciprocal of the reserve ratio
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the higher the reserve ratio...
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the less of each deposit banks loan out, and the smaller the money multiplier
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a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
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quantity theory of money
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variables measured in monetary units
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nominal variables
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variables measured in physical units
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real variables
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the theoretical seperation of nomial and real variables
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classical dichotomy
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the proposition that changes in the money supply do no affect real variables
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monetary neutrality
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the rate at which money changes hands
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velocity of money
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the equation M x V = P x Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services
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quantity equation
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the revenue the government raises by creating money
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inflation tax
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the one-for-one adjustment of the nominal interest rate to the inflation rate
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Fisher effect
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the resources wasted when inflation encourages people to reduce their money holdings
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shoeleather costs
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the cost of changing prices
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menu costs
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the increase in the overall level of prices
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inflation
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an extraordinarily high rate of inflation
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hyperinflation
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in the long run, the overall level of prices adjusts to the level at which?
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the demand for money equals the supply
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the price of one thing compared to another
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relative price
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If P = price level
Y = quantity of output and M = the quantity of money, what is velocity? |
V = (P x Y) / M
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M x V =
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P x Y
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real interest rate + inflation =
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nominal interest rate
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a period of declining real incomes and rising unemployment
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recession
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a severe recession
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depression
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the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend
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model of aggregate demand and aggregate supply
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a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level
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aggregate-demand curve
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a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level
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aggregate-supply curve
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the production of goods and services that an economy achieves in the long run when unemployment is at its nominal rate
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natural rate of output
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a period of falling output and rising prices
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staglflation
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