Credit Market Flashcards
Define the nominal interest rate
The additional payment, above and beyond a loan amount (principle), that a borrower has to repay on a $1 loan
What is the fisher equation
The real cost of a £1 loan for a year
r = i - π
What does the steepness of the credit demand curve tell us
The relationship between the real interest rate and the quantity of credit demanded
What does a relatively steep credit demand curve tell us
That the demand for credit doesn’t change much based on the change in real interest rates
When would a firm hire an additional machine
If the marginal product is higher than the real interest rate
Why is the credit demand curve downward sloping for business investment
Due to the diminishing marginal product of capital
What three things will the credit supply curve shift for
- Perceived business opportunities for firms
- Household preferences or expectations
- Government policy
What two things does the credit supply curve shift with
Saving motives of households
Saving motives of firms - retain earning
At what point in the credit market is equilibrium reached
Where the credit supply curve and the credit demand curve meet
What are the axes of the credit market graph
x-axis: Quantity of Credit
y-axis: Real Interest Rate (%)
What is stockholders equity
The difference between total assets and total liabilities
What are banks three main functions
- Identifying profitable lending opportunities
- Transform short term liabilities into long term assets
- Manage risk through diversification
