Econ Ch 3 Flashcards
The finanaal system channels from savers to borrowers
① households borrow to Finance purchases ② firms borrow to pay workers & upgrade capital.③ gov borrow to build roads, schools, & bridgesto purchase g &s & to make payments
Financial system
Financial markets & financial intermediaries
Financial market
Place I channel for buying financial securities
Financial securities
Tradeable financial assets [ bought & sold in markets]
Asset
Anything of value owned by a person or firm
Financial assets
A financial claim
Stock
A financial security that represents a legal claim on a share in the profits and assets on the firm
Bond
A financial security issued by a corporation or in government that represents a promise to repeat a fixed amount of funds
Securization
Process of converting loans & other assets that aren’t tradeable into securities
Information
The financial system gathers facts about borrowers & expectations on returns & communicates that info to lenders & investors
Ay symmetric information
One party has more info than another
Adverse selection
One party to a transaction takes advantage of knowing more than another party
Moral hazard
Actions people take after they have entered intoa transaction that make another party in the transaction worse off
Central Banks are established to be a “bankers bank” some functions performed:
1 regulate money supply ② LAST resort lender for banks ③ act as gov bank by playing role in collection & redistribution of gov funds ④ regulate financial system ⑤ facilitate payment by providing banks W/ cheque clearing & other services
Financial crisis
Significant disruption in the flow of funds from lenders to borrowers
Leverage
A measure of how much debt an investor takes on in making an investment
Leverage=
Total assets ÷ capital
Return on investment
Return on the asset * leverage
Fractional reserve banking system
Banks keep less than 100% of deposits on hand in the form of reserves
Reserves
Sum of funds physically present in the bank or on deposit W/ the bank of Canada
Bank run
Process by which depositors who have lost confidence in a bank simultaneously withdraw their funds
Bank panic
Banks experience runs at all once
Insolvency
Situation in which the value of an asset held him I think the clients to less than the value of its liabilities leaving the bank with a negative net worth
Contagion
The process by which a run on one financial institution spreads to other financial institutions resulting in a financial crisis
GOV has 2 main ways to help avoid bank panics
① Central bank as last resort lender ② gov can insure deposits
Present value one year into future
= future value +1 ÷ [1+ i ]
PV. =
[ Future value + n ]÷ [ 1 + i ]^n
Risk structure of interest rates
Relationship among interest rates on bonds that have diff characteristics but same maturity
Inverted yield curve
. The yield curve can slow down with investors investors expect future short-term rates to be significantly lower than current short-term rates
Term premium
The additional interest investors required in order to be willing to buy a long term bond and set up a comparable sequence of short term bonds
The higher a bank’s leverage
The less of its own capital it has exposed
If the c d i c increase moral hazard why was it set up? How else may they deal W/ panics
An effort to prevent panics / act as a lender of last resort, institute 100% reserve banking
Why is $200 you will receive in one year more worth than in 3 years
All of the above
Time value of money
The way that the value of a payment changes depending on when the payment is received
Risk structure o interest rates refers to the relationship
Among interest rates ON bonds that have different characteristics but same maturities
