Chapter 6: Money Flashcards
Finance
Providing the funds used for investment
Money
What is used to pay for goods and services
Physical capital
Tools, instruments, machines and other items that are used to produce goods and services
Financial capital
Funds that firms use to buy physical capital
Gross investment
Total amount spent on purchase of new capital and on replacing depreciated capital
Depreciation
Decrease in quantity of capital that results from wear and tear and obsolescence
Net investment
Change in the quantity of capital
Wealth
The stock of assets held by a person at a single point in time
Income
Money received by a person over some period of time
Saving
Amount of income not paid in taxes or spent on consumption
Financial capital markets
Transform saving and wealth into investment and capital
Bond
A promise to make specified payments on specified dates
Stock
A certificate of ownership and a claim on the firms profit
Loan markets
Businesses and households obtain loans from banks
Liquidity
Refers to how easy it is to buy and sell shares of a security without affecting the assets price
Volatility
A statistical measure of the dispersion of returns for a given security or market index
Financial institutions
A firm that borrows and lends in different markets
-Banks, pension funds, insurance companies
Net worth
Total market value of what a financial institution has lent minus the market value of what it has borrowed
Effects of new worth
- Positive: solvent
- Negative: insolvent
Illiquidity
A firm with no available physical cash.
There can be illiquidity but solvency
Relationship between price of assets and interest rate
- If price rises, interest rate falls
- If price falls, interest rate rises
Functions of money
- Medium of exchange
- Unit of account
- Store of value
Money as a medium of exchange
An object generally accepted in exchange for goods and services. It eliminates the need for barter
Money as a unit of account
An agreed measure for stating prices of goods and services
Money as a store of value
It can be held and exchanged later fpr goods and services
Bitcoins defects as money
- Not a medium of exchange
- Not a unit of account
- Not a store of value
Depository institutions
A firm that takes deposits from households and firms and makes loans to other households and firms
Types of depository institutions
- Commercial banks
- Thrift institutions
- Money market mutual funds
Commercial banks as depository institutions
A firm that is licensed to receive deposits and make loans
Assets in which banks transform deposits
- Cash assets
- Securities
- Loans
Money market mutual funds as depository institutions
A fund that sells shares and holds liquid assets
Benefits of depository institutions
- Create liquidity
- Pool risk
- Lower the cost of borrowing
- Lowers the cost of monitoring borrowers
How much money is their in the economy
Deposits+currency
What’s desired reserve ratio?
Ratio of banks reserves by total deposits that a bank plans to hold
Reserve requirement ratio
The minimum amount of reserves that must be held by a a bank
Real money
The quantity of money measured in constant dollars and equals miney divided by price level
Nominal interest rate
The opportunity cost of holding money.
Increase in nominam interest rate decreases the quantity of real money demanded
Quantity of money people want to hold depends on:
- Nominal interest rate
- Real GDP
- Financial innovation
Money market equilibrium
Occurs when the quentity of money demanded equals the quantity of money supplied
Who determined the quantity of money supplied?
European Central Bank
