Lecture 2 Flashcards
Mortgage back security
a type of bond representing snd investment in a pool of mortgage loans
What are the two reasons that MBS are sold
- to free up capital
- so that investors can buy into mortgages
Economic units
groups viewed in the aggregate eg. individuals, business firms or governments
Surplus economic unit
generate more money that it spends resulting in excess money to save or invest
Deficit economic unit
generate less money than it spends resulting in a need for additional money
Savings investment process
involve direct or indirect transfer of individual savings to business firms in exchange for debt and equity securities of the firm
Direct transfer
savers directly use money to purchase the debt or equity securities of a firm in the financial markets
Indirect transfer (investment banks)
a financial institution (investment bank) facilitates the process by purchasing equities first then reselling them to savers
Indirect transfer (financial institutions)
savers deposit money into financial institutions (bank) then issue their own securities to the saver. they then lend money to a business firm in exchange for their securities
Monetary system
responsible for creating and transferring money
3 parts of the central bank
- federal reserve system
- board of governors
- federal reserve banks
2 responsibilities of the central bank
- defines and regulates money supply
- facilitates the transferring of money through check processing and clearing
What does the banking system do (4)
- creates money
- transfers money
- provides financial intermediation
- processes and clears checks
2 types of asset
real assets and financial assets
Real assets
direct ownership of land, buildings, equipment inventories durable goods and precious metals
Financial assets
money, debt securities, financial contracts and equity securities that are backed by real assets
Money
a physical or electronic asset accepted as payment for goods and services
3 functions of money
- medium of exchange
- store of value
- standard of value
Medium of exchange
the basic function of money, money must be accepted
Standard of value
when prices and debts are stated in the terms of the monetary unit (£,$)
Store of value
when the price / value of money remains relatively stable overtime
Liquidity
how easily an asset can be exchange for money or other asset with little loss
Purchasing power
amounts of goods / services that can be bought with a unit of money
Inflation
increase in price of good / services that is not offset by increases in quality
Treasury bill
short term debt obligation issued by US government (91 days to 1 year)
Commercial paper
short term unsecured noted issued by high credit quality corporation
Negotiable certificate of deposit
short term debt instrument issued by depository institutions and traded in secondary market
Bankers acceptance
promise of future payment issued by an importing firm and guaranteed by bank, up to 6 months
Federal funds
very short term loans between depository institutions with excess funds and those with a need for funds (1 day to 1 week)
Repurchase agreement
short term debt security where seller agrees to repurchase security at specified rate and dates
What 4 things does the M1 money supply consist of
- currency
- demand deposits
- travellers checks
- other checkable deposits
What 4 things does the M2 money supply consist of
- M1
- savings accounts
- small denomination time deposits
- retail money market mutual funds
2 exclusions from money supply
- stock and bond mutual funds
- credit cards
GDP
measure of output of goods and services in an economy
Velocity of money
the rate of circulation of the money supply
Monetarists view
amount of money in circulation determines the level of GDP / economic activity
Keynesians view
change in MS cause change in interest rates which alters demand for goods causing GDP to grow
Monetarists view equation
GDP = MS x VM
Other equation for GDP
GDP = RO x PL
Equations combines
MS x VM = RO x PL
