Ch 24 credit market

Question 1

debtors

Answer 1

those who borrow loans

Question 2

credit

Answer 2

funds that debtors borrow

Question 3

interest rate

Answer 3

additional payment above repayment of the principal

Question 4

nominal interest rate vs real interest rate

Answer 4

nominal interest rate
i x L, where L is dollars and i is interest rate

real interest rate is nominal interest rate minus inflation
real interest rate r = i - inflation

Question 5

credit demand curve + steep vs flat

Answer 5

relationship between quantity of credit demanded and the real interest rate
steep, quantity of credit demanded doesnt change much in response to variation in real interest rate
flat, quantity of credit demanded is sensitive to interest rate

Question 6

shifts in credit demand curve

Answer 6

• changes in perceived business opportunities for firms, ex United increases prices if sales go up
• changes in household preferences or expectations, ex expecting a TV in a household leads to people borrowing more
• changes in govt policy, ex increase in govt borrowing

Question 7

credit supply curve

Answer 7

how much people are willing to save based on the real interest rate

Question 8

shifts in credit supply curve

Answer 8

• changes in the saving motives of households, ex predicting hard times ahead
• changes in the saving motives of firms, basically same thing but for firms

Question 9

financial intermediaries

Answer 9

banks, channel funds from suppliers of capital to borrowers

Question 10

assets vs liabilities

Answer 10

assets: investments the bank has made, money the bank is owed by borowers
liabilities: claims that depositors have against the bank

Question 11

what do assets include

Answer 11

bank reserves
cash equivalents, riskless liquid assets
long term investments

Question 12

what do liabilities include

Answer 12

demand deposits, funds loaned to the bank by depositors 
short term borrowing 
long term debt
stockholders equity (total assets - total liablities)

Question 13

3 main things banks do

Answer 13

1. identiy profitable lending opportunities
2. transform short term liabilities into long term investments (maturity transformation)
3. manage risk, transfer risk

Question 14

maturity and maturity transformation

Answer 14

time until debt must be repaid

short term liabilities into long term deposits = maturity transformation

Question 15

how to banks manage risk

Answer 15

diversified portfolio: not only invests in mortgages, but also a diverse set of assets
shifting risk to stockholders and to US govt

Question 16

when does a govt shut down a bank

Answer 16

when the stockholders equity falls below 0, ex it owes more than it has

Question 17

stockholders equity

Answer 17

total assets - total liabilities

Question 18

insolvent vs solvent

Answer 18

insolvent: failed bank, negative equity
solvent: positive equity

Question 19

bank runs + fire sales

Answer 19

everybody freaks the fuck out and tries withdrawing their money at once
bank has to sell illiquid assets, called fire sales because bank does not get a good price