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114 Cards in this Set
- Front
- Back
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financial system
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group of instittutions that move the economy's scarce resources from savers to borrowers
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financial markets
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institutions through which savers can DIRECTLY provide funds to borrowers
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Bond
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certificate of indebtedness (IOU)
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date of maturity
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time at which the bond (loan) will be repaid
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principal
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eventual repayment of the amount borrowed
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bond's term
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the length of time until the bond matures
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what type of bonds are riskier? Why?
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Long-term bonds, because they have to wait longer for repayment of principal. can not receive money until bond matures
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credit risk
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probability that the borrower will fail to pay some of the interest or principal
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default
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the failure of a borrower to pay some of the interest/principal
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do government bonds pay high or low interest rates? why?
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LOW, because the government is considered a safe credit risk
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junk bonds
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pay very high interest rates, issues by financially shaky corporations
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tax treatment
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the way the tax laws treat the interest earned on the bond
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municipal bonds
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state and local government-issued bonds
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stock
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claim to partial ownership in a firm
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equity finance
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the sale of stock to raise money
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debt finance
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the sale of bonds to raise money
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compared to bonds, stocks offer the holder both ____ ____ and ____ _____
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higher risk, potentially higher return
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financial intermediaries
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financial institutions through which savers can indirectly provide funds to borrowers
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medium of exchange
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an item people can easily use to exchnage in transactions
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store of value....ex.
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stocks, bonds, bank deposits
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index funds
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buy all the stocks in a given stock index
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identity
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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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budget surplus
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excess of tax revenue
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budget deficit
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shortfall of tax revenue
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investment refers to
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the purchase of new capital, such as equip or buildings
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market for loanable funds
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the market in which those who wantto SAVE SUPPLY funds and the who want to BORROW to invest DEMAND funds
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loanable funds
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all income that people have chosen to save and lend out
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the source of the SUPPLY of loanable funds
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saving
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the source of the DEMAND of loanable funds
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investment/borrowers
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quantiity of loanable funds demanded ____ as the interest rate _____
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quantiity of loanable funds demanded falls as the interest rate rises
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higher interest rate _____ saving and ____ borrowing
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higher interest rate encourages saving and discourages borrowing
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Real interest rate =
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Nom - Infl
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investment tax credit
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gives a tax advantage to any firm building a new factory or bying a new piece of equip
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If a reform of the tax laws encouraged greater investment, the result would be ___ interest rates and ____ saving
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If a reform of the tax laws encouraged greater investment, the result would be higher interest rates and greater saving
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government debt
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the accumulation of past government borrowing
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balanced budget
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if government spending exactly equals tax revenue
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a budget deficit shifts the supple curve for loanable funds to the ____. Why?
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LEFT. when the govt borrows to finance its budget deficit, it reduces the supply available for households and firms
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crowding out
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a decrease in investment that results from govt borrowing
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Federal Reserve (FED)
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the central bank of the US
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central bank
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oversees the banking system and regulates the quantity of money in the economy
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lender of last resort
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a lender to those qho can not5 borrow from anywhere else
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money supply
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the quantity of money available in the economy
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monetary policy
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the setting of the money supply by policymakers in the central bank
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open-market operation
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the purchase and sale of US govt bonds
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purchase of government bonds ____ the money supply
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purchase of government bonds increase the money supply
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Sale of government bonds ____ the money supply
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Sale of government bonds decreases the money supply
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reserves
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deposits that banks have recieved but have not loaned out
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100-percent reserve banking system
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all deposits are held as reserves
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Assets
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the reserves a bank holds
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liabilities
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the amount a bank owes to its depositors (deposits)
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money supply =
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currency + demand deposits
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money multiplier
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the amount of money the banking system generates with each dollar of reserves
RECIPROCAL OF RESERVE RATIO |
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the higher the reserve ratio, the ___ banks loan out, the ___ the money multiplier
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the higher the reserve ratio, the less banks loan out, the smaller the money multiplier
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bank capital
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the resources a banks owner's have put into the insitution
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owners equity
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the bank's liabilities and capital
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leverage
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the use of borrowed money to supplement existing funds for purposes of investment
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leverage ratio
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the ratio of the bank's total assets to bank capital
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capital requirement
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governemtn regulation specifying a minimum amount of bank capital
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credit crunch
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shortage of capital, forcing banks to reduce their lending
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discount rate
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the interest rate on the loans that the Fed makes to banks
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money serves 3 functions
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1.) medium of exchange
2.) unit of account 3.) store of value |
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a higher price level ____ the quantity of money demanded
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a higher price level increases the quantity of money demanded
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money neutrality
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changes in the money supply do not affect real variables
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velocity
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the rate at which money changes hands
V= (P x Y_/M (nominal GDP/quanitty of money) |
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inflation tax
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the revenue the govt raises by creating money
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shoeleather costs
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the resources wasted when inflation enourages people to reduce their money holdings
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menu costs
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the cost of changing prices
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capital gains
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the profits made by selling an asset for more than its purchase price
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Friedman rule
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shoeleather costs be minimized by a nominal interest rate close to zero, thus making deflation= real interest rate
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trade surplus
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excess of exports over imports
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trade deficit
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an excess of imports over exports
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foreign direct investment
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US opens an outlet in Russia
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foreign portfolio investmen
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US buys stock in Russian corporation
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positive net foreign investment
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domestic resident buying more foreign assets
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Purchasing power parity
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a unit of any given currency should be able to buy the same quantity of goods in all countries
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arbitrage
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the process of taking advantage ofprice differences for the same item in different markets
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Net capital outflow= capital outflow - capital inflow
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Net capital outflow= capital outflow - capital inflow
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high interest rate ____ net capital outflow
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high interest rate reduces net capital outflow
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depreciation of real exhange rate ____ net exports
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depreciation of real exhange rate increases net exports
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trade policy
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a government policy that directly influences the quantity of goods and services that a country imports or exports
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in import quota ____ the demand for dollars and causes the real exhange rate to _____
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in import quota increases the demand for dollars and causes the real exhange rate to appreciate
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capital flight
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a large and sudden reduction in the demand for assets located in a country
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the business cycle
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fluctuations in the economy
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Real GDP measures
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the value of all final goods and services produced within a given period of time
as well as the total income of everyone in the population |
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when real GDP falls, so do:
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personal income, corporate profits, consumer spending, investment spending, industrial production, retail sailes, home sales, auto sales, etc.
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when real GDP falls, uneployment ____
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when real GDP falls, uneployment rises
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aggregate DEMAND curve
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shows the quantity of goods and services demanded in the economy at each price level
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aggregate SUPPLY curve
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shows the quantity of goods and services that firms choose to produce and sell at each price level
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as the price level falls, real wealth _____ , interest rates _____, and the exhange rate _______
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as the price level falls, real wealth rises , interest rates fall, and the exhange rate depreciates
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stimulation in investment spending shifts aggregate demand curve to the ____
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right
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in the LONG RUN, the aggregate supply curve is ______,
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in the LONG RUN, the aggregate supply curve is vertical,
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in the SHORT RUN, the aggregate supply curve is _____ _____
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in the SHORT RUN, the aggregate supply curve is upward sloping
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natural rate of output
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shows what the economy produces when unemployment is at its normal rate
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when dthe government raises minimum wage, unemployment ____, the economy would produce a ____ quantity of goods and services and the long run aggregate supply curve would shift to the ____
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when dthe government raises minimum wage, unemployment rises, the economy would produce a smaller quantity of goods and services and the long run aggregate supply curve would shift to the left
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the long run aggregate SUPPLY curve is vertical because,
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in the long run, the overall level of prices does not affect the ecoonomy's ability to produce goods and services
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sticky wage theory
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an unexpected fall in the price level temporarily raises real wages which forces firms to reduce employment and production
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stagflation
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a period of falling output and rising prices
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sticky-price theory
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an unexpected fall in the price level leaves some firms with prices that are temporarily too high, which reduces their sales and causes them to cut back on production
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misperceptions theory
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an unexpected fall in the price level leads suppliers to mistakenly believe that their relative prices have fallen which induces them to reduce production
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theory of liquidity preference
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the interest rate adjusts to bring money supply and money demand into balance
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fiscal policy
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the setting of the level of government spending and taxation by government policymakers
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multiplier effect
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the addiitional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby inceases consumer spending
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marginal propensity to consume
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the fraction of extra income that a household consumes rather than saves
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automatic stabilizers
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changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policy makers having to take any deliberate action
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increase in government spending _____ aggregate demand
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increase in government spending stimulates aggregate demand
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an increase in the price level ____ money demand and ____ interest rate
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an increase in the price level RAISES money demand and INCREASES interest rate
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a higher interest rate _____ investment as well as the quantity of goods and services demanded (AD)
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a higher interest rate REDUCES investment as well as the quantity of goods and services demanded
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an increase in the money supply ____ the equilibrium interest rate
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an increase in the money supply REDUCES the equilibrium interest rate
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Philips curve
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a curve that shows the short run trade off between inflation and unemployment
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natural-rate hypothesis
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the claim the unemployment eventually returns to its normal rate regardless of the rate of inflation
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supply shock
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an event that directly alter's firms' costs and prices, shifting the economy's aggregate supply curve and, thus the Philips curve
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disinflation
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a reduction in the rate of inflation
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sacrifice ratio
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the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point
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rational expectations
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the theory that people optimall6y use all the information they have, including information about government policies when forcasting the future
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