Chapter 1 Flashcards
Supply of credit
Through which we can borrow funds to supplement our
incomes and support our standard of living.
Reservoir of savings
Through which we can set aside financial reserves
to draw upon for a “rainy day,” placing those savings in attractive financial instruments until the day arrives when we need extra funds.
Transformation of savings into investment
Such as the building of new facilities, the acquisition of equipment, stocking shelves with goods to purchase, so that we can find jobs and enjoy decent living standards.
Mechanism for making payments
Provides a channel so we can make purchases of goods and services, settle what we owe, so that spendable funds
move smoothly and reliably between buyers and sellers.
Creation of liquidity
Ensures that we have spendable funds exactly when they are needed, usually by converting the assets we hold (especially stocks, bonds, and similar financial instruments) into immediately spendable funds.
Provision of risk protection
In the form of insurance policies, derivative contracts, and other relatively inexpensive services that may shield us from excessive losses.
Channel for the pursuit of public policy
Permits governments and central banks to apply the tools they possess to stabilize the economy and financial system, pursuing such goals as maximum employment, price stability (absence of serious inflation), and sustainable
economic growth.
Key financial-service firms that collapsed
AIG, Bear Stearns, Goldman Sachs, Lehman Brothers, and Merrill Lynch
Financial system
The collection of markets, institutions, laws, regulations, and techniques through which bonds, stocks, and other
securities are traded; interest rates are determined; and financial services are produced and delivered around the world.
Financial system, primary task?
To move scarce loanable funds from those who save to those who borrow to buy goods and services and to make investments in new equipment and facilities so that the global economy can grow and increase the standard of living enjoyed by its citizens.
Basic function of the global economic system
Allocate scarce resources—land, labor, management skill, and capital—to their most highly valued use, producing the goods and services needed by society.
Circular flow
Flows of payments and production within the global economic system between producing units (mainly businesses and governments) and consuming units (principally households).
Most of the national income generated by the economy—which averaged more than $12 trillion in 2009—is spent on
Consumption of goods and services, the remainder is saved
What is a market?
It is an institution through which buyers and sellers meet to exchange goods, services, and productive resources.
Why is the marketplace dynamic?
It must respond continuously not only to changes in
consumers’ tastes, but also to the introduction of new goods and services, often associated with new technology.
Three types of markets
Factor, product, and financial.
What is a factor market?
Allocate factors of production—land, labor, managerial skills, and capital—and distribute income—wages, salaries,
rental payments, and so on—to the owners of productive resources.
What is a product market?
Food, shelter, automobiles, theater tickets, and clothing are among the many goods and services sold in product markets.
What is a financial market?
The financial markets channel savings to
those individuals and institutions needing more funds for spending than are provided by their current incomes.
What is savings?
(1) Households, savings are what is left from
current income after current consumption expenditures and tax payments are made.
(2) Business savings include current earnings retained inside business firms
after payment of taxes, stockholder dividends, and other cash expenses. (3) Government
savings arise when there is a surplus of current revenues over current expenditures in
a government’s budget.
Three types of savings
Personal, Business, Government
What is Investment?
Investment generally refers to the acquisition of capital goods, such as buildings and equipment, and the purchase of inventories of raw materials and goods
to sell.
Business Investment
For a business firm, expenditures on capital goods (fixed assets, such as buildings and equipment) and inventories (consisting of raw materials and goods offered for sale) are investment expenditures.
The global financial system has 7 basic economic functions that create a need for the money and capital markets.
Savings, wealth, liquidity, credit, payments, risk protection, and policy function.
What is net worth?
True measure of a household’s wealth is its net worth, or its assets minus its liabilities.
What is the money market?
Designed for making short-term loans. It is the institution through which individuals and institutions with temporary surpluses of funds meet the needs of borrowers who have temporary funds shortages (deficits). Thus, the money market enables economic units to manage their liquidity positions. (less than a year)
What is the capital market?
Designed to finance long-term investments by
businesses, governments, and households. Trading of funds in the capital market
makes possible the construction of factories, highways, schools, and homes. Financial
instruments in the capital market have original maturities of more than one year and
range from all sizes.
