Chapter 13 Flashcards
Financial system
The institutions that help to match one persons saving with another person’s investment; move the economies scarce resources from savers to borrowers
Categories of financial institutions
Financial markets and financial intermediaries
Financial markets
Institutions through which a person who wants to save can directly supply friends to a person who wants tomorrow.
Most important financial markets: bond market and stock market
Bond
A certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond (IOU).
Identifies:
(1) Time at which the loan will be repaid (date of maturity)
(2) Rate of interest
How bonds differ
1) Term: The length of time until a bond matures
2) Credit risk: probability that the borrower will fail to pay some of the interest or principal
3) Tax treatment: The way the tax laws treat the interest earned on a bond
Stock
Ownership in a firm; a claim to the profits that the firm makes
Offers higher risk and potentially higher return
*Price of share = most important piece of information about a stock
Equity finance
Sale of stock to raise money
Debt finance
Sale of a bond
Stock index
Computed as an average of a group of stock prices
How banks create money (banks as financial intermediaries)
Banks create new money by taking deposits and making loans. Banks pay depositors interest on their deposits and charge slightly higher interest on their loans.
Banks are the primary creator of money; government regulates the process
Financial intermediaries
Financial institutions through which savers can indirectly provide funds to borrowers
Most important financial intermediaries: banks and mutual funds
Dividend
Amount of profit corporations pay out to their stockholders
Price-earnings ratio
The price of a Corporation stock divided by the amount the corporation earned per-share over the last year
How banks facilitate purchases of goods and services
Banks allow people to write checks against their deposits and to access the deposits with debit cards (medium of exchange)
Medium of exchange
An item that people can easily use to engage in transactions
Mutual fund
An institution that sells shares to the public and use the proceeds to buy a selection/portfolio of stocks and bonds
Allow people with small amounts of money to diversify their holdings = less risk
Closed economy
Does not interact with other economies
Open economy
Interacts with other economies around the world
National saving
Total income in the economy that remains after paying for consumption and government purchases.
Y - C - G = I
S = I
Private saving
The amount of income that households have left after paying their taxes and paying for their consumption
Public saving
The amount of tax revenue that the government has left after paying for it spending
Budget surplus
Excess money when the government receives more money than it spends
Budget deficit
When the government spends more money then it receives in tax revenue
S = I
For the economy as a whole, savings should equal investments
