Chapter 4: Financial System and the Process of Decision Making Flashcards
4.1 )What is Financial Assets and Do They have a Physical State?
Types of accounts in which their clients maintain balances. Property of clients who have deposited their money into them.
Financial Assets have no physical state.
4 Common Financial Assets
Shares Account Deposits Loans (including mortgage) Term Deposits (SALT)
What 2 types of Financial Assets do the bank provide and own? And 3 Examples
They provide and own loans to their customers.
Provide a form of security for financial institutions through collateral.
Examples of loans:
Lines of Credit
Car Loan
Mortgages
What are Non-Financial Assets? Do They Have a Physical State? 4 Examples
Non-financial Assets are assets with a physical state.
Not created by the banks.
Examples: Land Equipment Machinery Buildings
4.2) Briefly Explain Flow of Funds
The borrowing and lending process requires the availability of funds for the lender to make to a borrower.
What Function Needs to Be Met for Financial Institutions to lend?
Function of saving.
Once saving has been accomplished, the funds can flow to borrowing clients.
What happens to Excess Funds on Deposit?
Lenders will convert reserves (excess funds) into loans to eligible borrowers.
Borrowers make _______ Payments to their ______
Interest
Lenders
Lenders make ______ Payments the their _____ _____
Interest
Saving Clients
FLOW OF FUNDS
explain the 4 activities
Household Sector —–> Business Sector
Land, Capital, Land, and Enterprise
Business Sector —–> Household Sector
Consumer goods and services
Household Sector —–> Business Sector
Consumption Spending
Business Sector -----> Household Sector Factor incomes (Wages interest, rent, profit)
Can the Flow of Funds be Disrupted? Explain.
The flow of funds cannot be disrupted. Clients have access to their funds and may withdraw money. Other clients will be depositing money into their account, enabling the flow of funds to continue.
4.3) The Economy depends on what?
Our consumption of goods and services.
The More ____ we ____, the More _____ we _____
money earned
money spent
3 Activities related to consumption and Slow economy
Spend and consume lesser amounts
Afraid Economy will worsen so people save money
Enough money to spend on day-to-day purchases
Total Consumption in our economy’s GDP is what percent range? and the Percentage of exports
60% - 70%
30%-40%
Define Utility Maximization. Briefly Explain.
The act of consuming to make ourselves as happy as possible.
Our happiness comes from purchases of the better things than what we currently have. ex. newer car
What are the two main reasons clients come to us? And how is it achieved?
Utility Maximization & Consumption
Achieved through clients borrowing money to meet those needs to better things. Ex. Vehicles, homes, vacations.
Clients want more than just their basic needs
What Judgements not to make for the clients?
And what is Perspective of clients cash flow? Explain.
Validity or appropriateness
The judgement of validity is not to be made for the client, they can do that for themselves. Our job is to ensure the ability of the client to handle the loan in the most financially responsible way possible.
4.4) Explain savings
Savings is income earned, but not spent
or
postponed consumption
4 Determinants of saving
- Transaction Demand
Used for day-to-day spending - Precautionary Demand
3 months worth of emergency funds - Speculative Demand
Used for Investment purposes - Attitude towards Money
Instant gratification
or frugal with their money
3 Components of Financial Literacy
- Understanding Financial Issues
- Achieving a level of financial responsibility
- Acquiring the tools achieve and maintain financial stability
Financial Literacy has no connection between 4 factors, what are they?
Age
Income level
Formal Education
Social Position
3 importance why Financial Literacy important to us?
A determinant of savings
Greatest value to our clients
Able to Manage frustrations
