Chapter 11: Credit, banks and money

Question 1

Collateral

Answer 1

Collateral is a borrower’s asset the ownership of which will be transferred to the lender if the borrower fails to repay the loan as agreed.

Question 2

Wealth

Answer 2

Stock of things owned; value of that stock. It includes the home that you own, your car, any land, buildings, machinery or other capital goods that you may own, and any financial assets such as shares or bonds. We subtract any debts that you have from this total (so that the wealth you have in your home is its market value, minus how much you owe to the bank). We add debts that others owe to you.

Question 3

Income

Answer 3

The amount of profit, interest, rent, labour earnings and other payments (including transfers from the government) received, net of taxes paid, measured over a period of time such as a year. Your income is the maximum amount that you could consume and leave your wealth unchanged. It is also referred to as disposable income, to distinguish it from pre-tax income that is not all available to be spent.

Question 4

Opportunity cost

Answer 4

When taking an action implies forgoing the opportunity of the next best alternative action, the opportunity cost of the action is the net benefit of the alternative.

Question 5

Pure impatience

Answer 5

This is a characteristic of a person who values an additional unit of consumption now, over an additional unit later, when the amount of consumption is the same now and later. Pure impatience arises when a person is impatient to consume more now: not because she has less now than she will have in the future, but because she places less value on consumption in the future for reasons of myopia, weakness of will, or for other reasons.