Ch 9 Money, Prices, and the Financial System Flashcards
Financial intermediaries
firms that extend credit to borrowers using funds raised from savers
Bond
a legal promise to repay a debt, usually including both the principal amount and regular interest, or coupon, payments
Principal amount
the amount originally lent
Maturation date
the date at which the principal of a bond will be repaid
Coupon payments
regular investment payments made to the bondholder
Coupon rate
the interest rate promised when a bond is issued; the annual coupon payments are equal to the coupon rate times the principal amount of the bond
Stock (or Equity)
a claim to partial ownership of a firm
Dividend
a regular payment received by stockholders for each share that they own
Risk premium
the rate of return that financial investors require to hold risky assets minus the rate of return on safe assets
Diversification
the practice of spreading one’s wealth over a variety of different financial investments to reduce overall risk
Mutual fund
a financial intermediary that sells shares in itself to the public, then uses the funds raised to buy a wide variety of financial assets
Money
any asset that can be used in making purchases
Medium of exchange
an asset used in purchasing goods and services
Barter
the direct trade of goods or services for other goods or services
Unit of account
a basic measure of economic value
Store of value
an asset that serves as a means of holding wealth
M1
the sum of currency outstanding and balances held in checking accounts
M2
All the assets in M1 plus some additional assets that are usable in making payments but at greater cost or inconvenience that currency or checks
Bank reserves
cash or similar assets held by commercial banks for the purpose of meeting depositor withdrawals and payments
100 percent reserve banking
a situation in which banks’ reserves equal 100 percent of their deposits
Reserve-deposit ratio
bank reserves dived by deposits
Fractional- reserve banking system
a banking system in which bank reserves are less than deposits so that the reserve-deposit ratio is less than 100 percent
Federal Reserve System (or the Fed)
the central bank of the United States
Monetary policy
determination of the nation’s money supply
Open-market purchase
the purchase of government bonds from th public by the Fed for the purpose of increasing the supply of bank reserves and the money supply
Open-market sale
the sale by the Fed of government bonds to the public for the purpose of reducing bank reserves and the money supply
Open-market operation
open-market purchases and open-market sales
Velocity
a measure of the speed at which money changes hands in transactions involving final goods and services, or equivalently, nominal GDP divided by the stock of money
Quantity equation
money times velocity equals nominal GDP
