Lecture 2 Flashcards
when was the rapid decline in housing prices?
2006
what was the impact of rising interest rates in 2006?
many homeowners weren’t able to make their mortgage loan repayments
what happened to mortgage backed securities when housing prices declined?
mortgage backed securities declined in value
financial institutions had inadequate equity due to loss in value of their MBS
what does MBS stand for?
mortgage-backed securities
what caused a credit crunch?
financial institutions having inadequate capital
what did federal government do to help solve the financial crisis?
they bailed out financial institutions
what are economic units?
individuals, business firms or governments
what is a surplus economic unit?
generate more money than they spend
what is a deficit economic unit?
generate less money than they spend
what is the savings-investment process?
involve the direct or indirect transfer of individual savings to business firms in exchange for debt and equity securities of the firm
what are the two indirect transfers in the savings-investment process
- savers to investment banking firm to business firm
- savers to financial institution to business firm
what is the direct transfer in the savings-investment process
savers to business firms
how does the US monetary system work?
central bank regulates money supply and facilitates the transfer of money to feed into the banking system
what are the roles of the banking system?
creates money
transfers money
provides financial intermediation
process/clears checks
define reserves
represents the money held by the bank so that it can pay off checks
what are the types of assets?
real assets
financial assets
what are real assets?
direct ownership of tangible asset (e.g., land, buildings, equipment, invesntories)
what are financial assets?
money, debt securities and financial contracts, and equity securities that are backed by real assets & the earning power of issuers
what is money?
a physical or electronic asset that is accepted for goods or the repayment of debts
what are the functions of money?
medium of exchange
standard of value
store of value
explain medium of exchange
the basic form of money being exchanged for goods/services
explain standard of value
occur when prices and debts are stated in terms of the monetary unit
explain store of value
money held for some period of time before it’s spent
define liquidity
how easily an asset can be converted into cash or other assets
define purchasing power
amount of goods/services that can be purchased with a unit of money
define inflation
the increase in the price of goods/services which isn’t offset by an increase in quality
what are money markets?
where debt securities with less than 1 year are traded
what is a treasury bill?
short-term debt obligation issued by the US federal government
what are UK government bonds called?
gilts
what is commercial paper?
short-term unsecured note issued by a high credit-quality corporation
what is a negotiable certificate of deposit (negotiable CD)
short term debt instrument issued by depository institutions, traded in the secondary markets
what is banker’s acceptance?
promise of future payment issued by an importing firm and guaranteed by a bank (up to 6 months)
what is repurchase agreement?
short-term debt security where the seller agrees to repurchase the security at a specified price and date
what are federal funds?
very short-term loans between depository institutions with excess funds and those with a need for funds
what is M1 all about?
money as a medium of exchange
what is M2 all about?
money as a medium of exchange plus highly liquid financial assets (as a store of value)
what are demand deposits?
commercial banking checking accounts
what is GDP?
gross domestic product
a measure of the output of goods and services in an economy
what is VM?
velocity of money
the rate of circulation of the money supply
what is MS?
money supply
what is the basic equation for monetarists view?
MS x VM = GDP
money supply x velocity of money = gross domestic product
what is an alternative way that GDP can be calculated?
RO x PL = GDP
real output x price level = gross domestic product
credit crunch = ?
a sudden sharp reduction in the availability of money or credit from banks and other lenders
