Chapter 20 Flashcards
Financial System
The institutions in the economy that facilitate the flow of funds between savers and investors
Financial Markets
Households can directly provide resources for investment
Bonds
Represents a loan from the bondholder to the firm
Stocks
Represents an ownership claim by the shareholder in the firm
Debt Finance
Raising investment funds by issuing bonds
Equity Finance
Raising funds by issuing stock
Financial Intermediaries
Households can indirectly provide resources for investment
Risk Averse
Disinclined or reluctant to take risks
Diversification
Reducing risk by holding many imperfectly correlated assets
Mutual Funds
Financial intermediaries that sell shares to savers and use their funds to buy diversified pools of assets
Asymmetric Information
A situation in which one party to an economic transaction has more information about the transaction than the other
Adverse Selection
The tendency of people with more information to sort themselves in a way that disadvantages people with less information
Moral Hazard
The risk that an imperfectly monitored agent will act in a dishonest or otherwise inappropriate way
Financial Crisis
A major disruption in the financial system that impedes the economy’s ability to intermediate between those who want to save and those who want to borrow and invest
Speculative Bubble
A spike in asset values within a particular industry. Usually caused by exaggerated expectations of future growth
Leverage
The use of borrowed funds for the purposes of investment
Fire Sale
As banks sell off some of their assets, buyers of risky assets are hard to find in the midst of a crisis, so the assets prices can sometimes fall
Liquidity Crisis
A situation in which a solvent bank has insufficient funds to satisfy its depositors withdrawals
Lenders of Last Resort
When a central bank lends to a bank in the midst of a liquidity crisis
Shadow Banks
A diverse set of financial institutions that perform some functions similar to those of banks but do outside the regulatory system that applies to traditional banking
Microprudential
Its goal has been to reduce the risk of distress in individual financial institutions
Macroprudential
Its goal is to reduce the risk of system wide distress, thereby protecting the overall economy against declines in production and employment
