Chapter 5: Supply and demand for money and risk return Flashcards
What is Risk?
Possibility of potential loss
What is the Context of Risk and Investing?
Potential that an investment may prove to be unprofitable
What is Return
What savers and investors expect to receive on any investment
Explain a return in the form of an investment
Money in a savings account expecting some return on money they leave on deposit
Explain return on GIC’s and Term Deposits
Large amounts of money expect to receive large amount to compensate for having their money in the financial institution for a fixed period of time.
_____ rate of return, ______ degree of risk
Higher
Higher
Impossible to have regarding Investing
Guaranteed high rate of return, low degree of risk
the perfect investment does not exist.
If that Perfect investment did exist, everybody would have their money in that investment and be rich. There would be no investing in the stock and bond market, or the real estate market.
What Happens when the Degree of Risk Climbs over comfortablility?
Demand and supply of money to invest in higher-risk investments tend to decline
What Happens when the Degree of risk is lower then threshold?
Demand and supply for money to invest increases.
What Happens to supply and demand for money in Recession?
Lower Demand for money
Individuals save more spend less - worries about job
Businesses invest less - worried about bankruptcy
5.2) What happens to demand for money through an increase in inflation?
Money stays at the same pace.
Inflation goes up 5%, costs goes up 5% for the same item in the same quantity.
Businesses
Hold excess cash, find other assets that would provide them with a high enough rate of return.
What is demand-pull inflation? what does it do the the economy? how does it affect the economy?
Consumers want to buy more of any given product.
Demand goes up, supply goes up, more goods produced.
Helps economy grow
More jobs
What is Cost-push inflation?
Component-costs from suppliers and other sources rise
How does inflation help with Government Debt?
Inflation causes prices to increase, causing the federal government revenue to increase as well through GST.
Earn off income tax revenue, through higher levels of income.
8 Factors of Financial Risks, name and explain 3.
Default: Borrowers failure to meet payments of interest, principle, or both. Ability to pay off debt without any interruptions
Liquidity: Investment cannot be converted back into cash quickly, or without a loss of principle.
Foreign exchange: Two currencies have a negative effect upon investment denominated in another country.
