banks and finance Flashcards

1
Q

interest rate

A

what it costs you to borrow money (when money is limited you pay more for it)

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2
Q

MRT- borrowing

A

tradeoff between current and future consumption

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3
Q

real interest rate

A

adjusting for inflation

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4
Q

interest rate- demand

A

number of people who have access to credit markets, uncertainty of making new investments

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5
Q

interest rate- supply

A

people increasing savings (old people), access to foreign capital, uncertainty over the state of the economy (great depression)

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6
Q

benefits of debt

A

to make an investment today that will hopefully pay off in the future (car, education, house)

to avoid liquidating assets to make payments (selling the things you have)

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7
Q

consumption smoothing

A

have a decent standard of living your whole life.

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8
Q

tax smoothing

A

borrowing helps governments overcome gaps in taxes and revenues.

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9
Q

discount rates

A

concern about the future or immediate gratification

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10
Q

myopia reasons

A

uncertainty about the future incentives spending more money.

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11
Q

discount rate formula

A

value today / value tmr

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12
Q

individuals borrow at the point where…

A

MRS = MRT

discount rate = interest rate

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13
Q

supply of credit

A

interest rates are determined by supply and demand

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14
Q

principal agent problem

A

borrowing is another incomplete contract - you can’t make sure if they’re gonna pay back or put it to good use.

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15
Q

how do we overcome p.a problem?

A

equity, collateral (these help create compatible incentives)

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16
Q

equity

A

lender may require the borrower to put some of their wealth into the project

17
Q

collateral

A

the borrower has to set aside property that will be transferred to the lender if the loan isn’t repaid.

18
Q

credit rationing

A

poor people have a hard time signalling that they will pay it back.

  • credit constrained: borrow on unfavorable terms.
  • credit-excluded: refused.
19
Q

unsecured credit

A

like a credit card, without collateral or equity (happens when there’s a robust credit market)

20
Q

how do we solve the time inconsistency problem?

A

delegating a 3rd party to constrain yourself - limiting your future agency - legal system - credit rating agency

21
Q

financial intermediaries

A
  1. banks
  2. stock market
  3. bond market
22
Q

bank

A

attracts deposits by paying interest - reducing transaction costs - you give money to bank and they deal with the risks

23
Q

stock market

A

represent ownership in firm

24
Q

bond market

A

its an IOU (i owe you) - you get a promise that you’ll get an interest on your funds in the future