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Econ 102 > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

Define Investment

A

incur some upfront cost today in hopes of receiving future-benefits

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2
Q

Macroeconomics definition of investment

A

spending on new capital assets that increase the economy’s productive capacity

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3
Q

Define saving

A

the money you have leftover after paying for your spending

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4
Q

capital stock

A

total quantity of capital at a point in time

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5
Q

Define business investment

A

spending by businesses on new capital investments

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6
Q

Define inventories

A

raw materials, work in progress, unsold goods

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7
Q

Housing investment

A

spending on building new houses or apartments as well as improvements to existing housing

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8
Q

Compound interest

A

you earn interest not only on your initial deposit but also on your previously earned interest, so your wealth compounds

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9
Q

Define present value

A

amount of money that you’d invest today in order to produce an equivalent benefit in the future

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10
Q

depreciation rate

A

the proportion of an investment’s remaining productive capacity you lose each year due to depreciation

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11
Q

Rational rule for investors

A

pursue an investment opportunity if the present value of future revenue exceeds the up-front cost

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12
Q

Factors that shift investment

A

interest rates, rational rule for investors:

  • technological advances
  • expectations
  • corporate taxes
  • lending standards and cash reserves
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13
Q

Define market for loanable funds

A

market for funds used to buy, rent, or build capital

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14
Q

what does the market for loanable funds determine?

A

long-run real interest rate and the quantity of investment

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15
Q

the price of a loan is equal to what

A

real interest rate

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16
Q

Define neutral real interest rate

A

interest rate that operates when the economy is in neutral (producing neither above/below its potential)

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17
Q

How is supply shifted in the loanable funds market?

A

If there is a change in savings by those who supply loanable funds–> private savers, government, foreigners

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18
Q

Specific shifts in supply of loanable funds

A
  • changes in personal savings rates
  • budget deficit or surplus shifts gov. spending
  • Global shocks shift foreign saving
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19
Q

Specific shifts in demand of loanable funds

A
  • techological advances
  • expectations
  • corporate tax
  • Easier lending standards/ cash reserves
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20
Q

Three types of investment

A

business, inventories, and housing investment

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21
Q

Define crowding out

A

phenomena where government needs to borrow money and crowd out money that could have been used by firms

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22
Q

How does the bank earn profit?

A

By putting your money to work after you put it in a bank

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23
Q

Functions of banks

A
  • pool savings from many savers
  • spread the risk of lending money across many borrowers
  • solve information problems
  • provide payment services
  • create long-term loans from short-term deposits
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24
Q

Define maturity transformation

A

using short-term loans to make long-term loans– ensures investors can fund long-term projects

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25
Q

Bank run

A

occurs when many customers try to withdraw their savings at the same time–> can cause a bank to collapse

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26
Q

Fire sale

A

a quick sale due to financial distress

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27
Q

Deposit insurance

A

makes bank runs less likely and ensures you will always get your savings back even if your bank collapses

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28
Q

shadow banks

A

not real banks not covered by deposit insurance

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29
Q

Bond market

A

where the “big dogs” go to borrow the big bucks

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30
Q

Bond

A

an IOU that spells out the terms of a loan

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31
Q

Borrower is also known as

A

the issuer

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32
Q

The principal

A

how much money has to be repaid

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33
Q

The maturity date

A

when the loan must be repaid

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34
Q

Coupons

A

the interst promised to be payed

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35
Q

Functions of the bond market

A
  • Channels funds from the savers to the borrowers
  • Funds gov. debt
  • Spreads risk by issuing money to many companies
  • Creates liquidity
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36
Q

Liquidity

A

the ability to quickly and easily convert your investments to cash with little or no loss in value

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37
Q

Default risk

A

cost of not getting paid– assigns credit ratings to businesses to ensure this does not happen

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38
Q

Term risk

A

arrises when there is uncertainty about future interest rates

39
Q

Liquidity risk

A

when your bond will be hard to sell–> need to sell an asset quickly, might not be able to get a good price for it

40
Q

What is the safest investment

A

US gov bonds

41
Q

What does a stock represent

A

partial ownership in a firm– when you own a stock in a company, you own a share in that company

42
Q

Dividends

A

tallies up its profits and pays some as dividends

43
Q

retained earnings

A

profits not sent out as dividends which are reinvested into the company

44
Q

Functions of stocks

A
  • channel funds from savers to investors
  • reallocate control
  • creates liquidity and makes it easier to own stocks
45
Q

IPO

A

initial public offering of stock to potential investors

46
Q

stock price

A

how much a company is worth

47
Q

stock price chart

A

shows how risky a stock is over time

48
Q

Market capitalization

A

value of the entire company

49
Q

Efficient market hypothesis

A

at any point in time, financial prices reflect all publicly available information.

  • Impossible to predict the stock’s value
  • Financial prices move unpredictably
50
Q

Federal funds rate

A

rate banks charge each other for overnight loans

51
Q

Reserve requirements

A

minimum amount of reserves that each bank must hold

52
Q

Open market trading desk

A

where fed buys and sells gov. bonds overnight w agreement to buy back next day at a higher price

53
Q

Floor framework

A

floor on how low of an interest rate a financial institution will be willing to lend another

54
Q

Discount rate

A

banks offer collateral and get a loan from the fed that helps them meet the reserve requirements

55
Q

Yield

A

a way of measuring expected returns from a bond

56
Q

What is a treasury bond used for

A

to pay for deficit spending

57
Q

Speculative bubbles

A

the price of an asset rises above its fundamental value (highly inflated prices)

58
Q

Greater fool theory

A

you can always find someone else to buy your stock

59
Q

Mutual funds

A

a fund that buys a portfolio of stocks and bonds on your behalf

60
Q

Index funds

A

A mutual fund that consists of a broad market index

61
Q

Excess reserves

A

amount banks have on their reserves above the required amount creates a minimum interest floor

62
Q

Globalization

A

increasing global integration of economies, cultures, political institutions and ideas

63
Q

Financial inflows

A

foreigners investing in the United states–> funds flow into the U.S.

64
Q

Financial outflows

A

Americans investing their money in other countries–> funds flow out of the U.S.

65
Q

Financial flows

A

investment in foreign physical assets financial assets and loans

66
Q

Portfolio investment

A

foreigners buy american stocks or bonds

67
Q

Deposits and loans

A

foreigners lend money to americans

68
Q

when financial flows start rising

A
  • countries remove capital controls
  • Deregulation of the financial sector
  • Large institutional investors
  • Technology
  • Financial innovation
69
Q

Appreciate

A

currency becomes more expensive

70
Q

Depreciate

A

currency becomes cheaper

71
Q

Shifts in demand currency

A
  • Exports from the U.S.
    • Strengths of the global economy
    • Barriers to trade in foreign market
    • Domestic innovation and marketing
    • Foreign Prices
    • Domestic prices
  • Financial inflows in the U.S.
    • interest rate differentials
    • Business profitability
    • Political risk
    • Expected exchange rate movements
72
Q

Shifts in supply currency

A
  • Imports in the U.S.
    • strength if the domestic economy
    • trade barriers protecting domestic producers
    • foreign innovation and marketing
    • domestic prices
    • foreign prices
  • Financial outflows from the U.S.
    • interest rate differentials
    • business profitability
    • political risk
    • expected exchange rate movements
73
Q

What does the real exchange rate measure?

A

(un) competitiveness of american products

- low real exchange rate means goods are competitive

74
Q

real trade-weighted index

A

evaluates American competitiveness relative to a weighted average of dozens of our most important trading partners

75
Q

Quantitative anchoring

A

prices in the previous period is an anchor for what you think prices would be next period

76
Q

Moral anchoring

A

psychological thinking says most of what determines human thinking is a result of stories and justification, not numbers

77
Q

Absolute advantage

A

being the most efficient in finishing a task

78
Q

Comparative advantage

A

the ability to do a task at a lower opportunity cost

79
Q

What factors shape comparative advantage?

A
  • Having abundance of certain resources/inputs
  • Develop a specialized skill
  • Exploit the benefits of mass production
80
Q

Foreign direct investment

A

a new building/company or plant, other physical assets

81
Q

Purchasing power parity

A

two currencies can buy the same amount of goods

82
Q

Aggregate expenditure

A

describes everyone’s spending plans

83
Q

When does the macroeconomic equilibrium occur

A

when aggregate expenditure is equal to GDP

84
Q

short-run

A

year to year ups and downs

85
Q

long-run

A

economy’s potential output

86
Q

potential output

A

level at which all resources are fully employed

87
Q

output gap

A

measures the gap between actual and potential output a a percentage of potential output

88
Q

IS curve

A

illustrates the link between interest rates, GDP and the output gap

89
Q

MP curve

A

how changes in the risk premium affect the real interest rate

90
Q

Multiplier

A

summarizes effect of an initial burst of spending on output

91
Q

Positive output gap

A

economy is overheating, producing too much

92
Q

Negative output gap

A

some resources are not used to full capcity

93
Q

Okun’s rule

A

for every percentage point that actual output falls below potential output the unemployment rate is around half a percentage higher

94
Q

Who determines the risk premium

A

financial markets

Econ 102 (3 decks)

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