Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
55 Cards in this Set
- Front
- Back
|
Finance |
How households and firms obtain and use financial resources and how they cope with the risks that arise in this activity |
|
|
Money |
How households and firms use money, how much of it they hold, how banks create and manage it, and how its quantity influences the economy |
|
|
Physical capital |
Tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services |
|
|
Financial capital |
The funds that firms use to buy physical capital |
|
|
Gross Investment |
Total amount spent on purchases of new capital and on replacing depreciated capital |
|
|
Depreciation |
Decrease in the quantity of capital that results from wear and tear and obsolescence |
|
|
Net Investment |
Change in quantity of capital =Gross investment - Depreciation |
|
|
Stock variable vs flow variable |
Measured at one specific time vs a time interval |
|
|
Wealth |
Value of all the things that people own |
|
|
Saving |
The amount of income that is not paid in taxes or spent on consumption goods services |
|
|
Wealth increases from: |
Saving
Capital gains - market value of assets rises (will decrease in capital losses |
|
|
Financial Capital Markets |
1. Loan Markets 2. Bond markets 3. Stock markets |
|
|
Loan Markets |
Both businesses and households obtain loads from banks eg) financing for inventories, purchasing houses |
|
|
Bond markets |
Businesses and governments can raise funds by issuing bonds A bond is a promise to make specified payments on specified dates |
|
|
A mortgage-backed security |
Type of bond which entitles its owner to the income from a package of mortgages |
|
|
Stock markets |
Businesses can raise funds by issuing stock. A stock is a certificate of ownership and a claim to the firm's profit |
|
|
Financial Institution |
A firm that operates on both sides of the markets for financial capital by being a borrower in one market and a lender in anouther |
|
|
Key financial institiutions |
Commercial banks Trust and loan companies Credit unions and Caisses Populaires Pension funds Insurance companies |
|
|
Financial institution Net Worth |
Total market value of what it has lent minus the market value of what it has borrowed
|
|
|
Solvent |
Positive net worth, will remain in business |
|
|
Insolvent |
Negative net worth, insolvent |
|
|
Iliquid |
Firm can not meet a sudden demand to repay what it has borrowed because it does not have enough available cash Can be iliquid and solvent |
|
|
Interest rates on financial assests |
Interest/ Asset Price |
|
|
Net Taxes |
Taxes paid to governments minus the cash transfers received from governments |
|
|
Household Income equation |
I=S+(T-G)+(M-X) |
|
|
Market for loanable funds |
Aggregate of all the individual financial markets |
|
|
Sources of Finance Investments |
1. Household saving S 2. Government budget surplus (T-G) 3. Borrowing from the rest of the world (M-X) |
|
|
Nominal interest rate |
The number of dollars that a borrower pays and a lender receives in interest in a year expressed as a percentage of the number of dollars borrowed and lent |
|
|
Real interest rate |
Nominal interest rate adjusted to remove the effects of inflation on the buying power of money = nominal interest rate - inflation rate "the opportunity cost of buying" |
|
|
Six main factors that change demand |
-prices of related goods -expected future prices -income -expected future income and credit -population -preferences |
|
|
Change in demand vs change in the quantity demanded |
Shift of the demand curve vs movements along the same demand curve |
|
|
Six main factors that change supply |
-prices of factors of production -prices of related goods produced -expected future prices -number of suppliers -technology -state of nature |
|
|
Increase in Demand and Supply |
Equilibrium quantity increases Change in price is uncertain because increase in demand raises price and increase in supply lowers it |
|
|
Decrease in Demand and increase in supply |
Lowers equilibrium Change in quantity is uncertain because the decrease in demand decreases quantity and increase in supply increases it |
|
|
Quantity of loanable funds demanded |
Total quantity of funds demanded to finance investment, the government budget deficit and international investment for lending Business investment is main demand Quantity of loanable funds demanded and real interest rate |
|
|
Quantity of loanable funds demanded depends on: |
1. The real interest rate (-) 2. Expected Profit (+) |
|
|
Rightward shift on demand for loanable funds |
Greater expected profit from new capital means greater amount of investment and greater demand for loanable funds |
|
|
Quantity of loanable funds supplied depends on |
1. The real interest rate (+) 2. Disposable income (+) 3. Expected future income (-) 4. Wealth (-) 5. Default risk (-) |
|
|
Quantity of loanable funds supplied |
Total quantity of funds available from private savings, government budget surplus, and international borrowing Saving is the main item Quantity of loanable funds supplied and real interest rate |
|
|
Supply of loanable funds is affected by: |
change in disposable income, expected future income, wealth, or default risk |
|
|
Equilibrium in Loanable funds market |
Quantity supplied equals quantity demanded equals real interest rate |
|
|
Financial market volatility |
Highly volatile in the short run and stable in the long run Volatility is caused by fluctuations supply and demand - causes fluctuations in real interest rate and equilibrium quantity and asset prices |
|
|
Demand for loanable funds increases |
Real interest rate rises Saving and quantity of funds supplied increase |
|
|
Supply of loanable funds increases |
The real interest rate falls Investment increase |
|
|
Short run demand and supply |
Real interest changes because demand and supply change at different rates |
|
|
Long run demand and supply
|
Real interest doesn't change because demand and supply grow at the same pace |
|
|
Real interest rate trend |
No long run trend, fluctuates at a constant level |
|
|
Government surplus |
Increases supply of funds Equilibrium real interest rate falls Investment increases Saving decreases |
|
|
Government deficit |
Increases the demand for funds Equilibrium rises Saving increases Investment decreases |
|
|
Crowding out effect |
The tendency for a government budget deficit to raise the real interest rate and decrease investment Budget deficit competes with businesses for scarce financial capital |
|
|
Ricardo-Barro effect |
Government budget has no effect on real interest rate or investment Deficit increases demand, rational taxpayers increase saving, supply of funds increase, this finances the deficit and crowding out is avoided |
|
|
Single integrated global market |
Borrowers are free to seek low interest rates and lenders are free to seek high rates |
|
|
Fund flow |
Into country with highest interest rate and out of country with low interest rate |
|
|
Negative net exports |
World supplies funds Quantity of loanable funds in the country is greater than normal saving |
|
|
Positive net exports |
Country supplies funds to rest of world Quantity of funds is less than national saving |
