Midterm 2 Flashcards
financial market
a market in which people trade future claims on funds or goods.
Functions of a bank
- It acts as an *Intermediary between borrowers and savers.
- *Liquidity: it makes it easier to have access to cash when and where you want it.
- It helps savers and borrowers *diversify risk
market for loanable funds
market in which savers, who have money to lend, supply funds to those who borrow for their investment spending needs.
savings
The portion of income that is not immediately spent on consumption of goods and services.
investment
spending on productive inputs such as factories, machinery, and inventories.
interest rate
the price of borrowing. the price charged by a lender to a borrower for the use of funds.
factors that shift the supply of savings (determinants of savings)
- culture
- social welfare policies
- wealth
- current economic conditions
- expectations about future economic conditions
default
when a borrower fails to pay back a loan according to the agreed upon terms.
credit risk
the risk of a borrow defaulting on a loan
risk-free rate
the interest rate at which one would lend if there were no risk of default. Usually approximated by interest rates on Canadian government debt
credit spread / risk premium
the difference between the risk-free rate and the interest rate a particular investor has to pay
financial system
the institutions that bring together savers borrowers, investors, and insurers in a set of interconnected markets where people trade financial products
financial intermediary
institutions that channel funds from people who have them to people who want them
liquidity
a measure of how easily a particular asset can be converted quickly to cash without much loss of value.
diversification
process by which risks are shared among many different assets or people, reducing the impact of a particular risk on any one individual.
stock
a financial asset that represents partial ownership of a company. An equity asset.
dividend
a payment made periodically, typically annually or quarterly, to all shareholders of a company.
loan
an agreement in which a lender gives money to a borrower in exchange for a promise to repay the amount loaned plus an agreed upon amount of interest
bond
a promise by the bond issuer to repay the loan at a specified maturity date, and to pay periodic interest at a specific percentage rate.
securitization
turns many loans into a single larger asset thus reducing the risk to the lender of any individual borrower defaults on the loan
derivative (futures contract)
an asset whose value is based on the value of another asset, such as a home loan, stock, bond, or barrel of oil.
mutual fund
a portfolio of stocks and other assets, managed by a professional who makes decisions on behalf of clients
index fund
mutual fund where the funds buy all the stocks representing a broad market, with a goal of mirroring the same return as the market average.
specialized fund
mutual fund where the dude is researching specific companies and picking stocks they hope will earn higher returns than the market average.
pension fund
professional managed portfolio of assets intended to provide income to company retirees
market risk (systemic risk)
any risk that is broadly shared by the entire market of economy
idiosyncratic risk
unique to a particular company or asset
standard deviation
a measure of how spread out a set of numbers is
net present value (npv)
a measure of the current value of a stream of cash flows expected in the future
efficient-market hypothesis
market prices always incorporate all available information and therefore represent true value as correctly as possible. Only in a closed economy?
closed economy
an economy that does not interact with other countries’ economies
open economy
interacts with other countries’ economies
net capital flow
the difference between capital inflows and capital outflows
capital outflow
when money saved domestically is invested in another country
capital inflow
when savings from another country finance domestic investment
fundamental analysis
refers to finds out as much information as possible on the firms or governments that issue securities
technical analysis
bases predictions for future security performance on past performance
money
the set of all assets that are regularly used to directly purchase goods and services
functions of money
store of value
medium of exchange
unit of account
store of value
an item that represents a certain amount of purchasing power that is retained over time.
medium of exchange
an item that can be used to purchase goods and services
barter
to directly offer a good or service in exchange for a desired good or service
unit of account
a standard unit of comparison
intrinsic value
value unrelated to an items use as money
commodity-backed money
any form of money that can be legally exchanged for a fixed amount of an underlying commodity
fiat money
money created by rule, without commodity to back it
demand deposits
funds held in banks that can be withdrawn by depositors at any time without advance notice
reserves
the cash that a bank keeps in its vault
reserve ratio (definition)
the ratio of the total amount of deposits at a bank to the amount kept as cash reserves.
reserve ratio (formula)
amount kept
= ————————- x 100
amount deposited
desired reserves
the amount the bank is desired to keep on hand
excess reserves
any additional amount beyond the desired reserves that the bank chooses to keep in reserve
money multiplier (definition)
the ratio of money created by the lending activities of the banking system to the money created y the governments central bank.
money multiplier (formula)
1
= ———-
reserve ratio
fractional-reserve banking
banking system in which banks keep on reserve less than 100% of their deposits
money supply
the amount of money available in the economy
M1
definition of money, includes cash (hard money) plus chequing account balances.
M2
definition of money, includes M1, personal savings accounts, and non-personal notice deposits where money is locked away for a specified period of time.
central bank
the institution ultimately responsible for managing the nations money supply and coordinating the banking system to ensure a sound economy
monetary policy
actions by the central bank to manage the money supply, in pursuit of certain macroeconomic goals
reserve requirement
the regulation that sets the minimum fraction of deposits banks must hold in reserve
open market operations
sales or purchases of government securities by the central bank to or from banks on the open market.
contractionary monetary policy
actions that reduce the money supply in order to decrease aggregate demand
expansionary monetary policy
actions that increase the money supply in order to increase aggregate demand
overnight rate
the interest rate at which banks choose to lend reserves held at the Bank of Canada to one another, usually just overnight
liquidity preference model
explains that the quantity of money people want to hold is a function of the interest rate
inflation
an overall rise in prices in the economy. each dollar becomes less valuable over time.
deflation
an overall fall in prices in the economy
core inflation
a measure of inflation that excludes goods with historically volatile prices
headline inflation
a measure of inflation that includes goods with historically volatile items.
overall inflation
a measure of inflation that includes virtually all of the goods that the average consumer purchases.
aggregate price level
a measure of the average price level for GDP and is measured by either CPI or the GDP price deflator
neutrality of money
the idea that aggregate price levels do not affect real outcomes in the economy
quantity theory of money
the aggregate price level is determined by the money supply. That inflation/deflation are primarily the result of changes in money supply.
velocity of money (definition)
the number of transactions in which a typical dollar is used during a given period.
velocity of money (formula)
money supply
menu costs
the cost of changing prices to keep pace with inflation
shoe leather costs
the cost people must spend managing cash in the face of inflation
nominal interest rate
the reported interest rate
real interest rate (definition)
the interest rate adjusted for the effects of inflation
real interest rate (formula)
nominal interest rate - inflation rate
disinflation
a period during which overall inflation rates, while still positive, are falling.
hyperinflation
extremely long-lasting and painful increases in the price level, usually enough to render currency completely valueless or close to it
potential output
the total amount of output the country could reasonably produce if all of its people and capital resources were fully engaged
output gap
when an economy’s actual output differs from its potential at some point in time
Phillips curve
the negative relationship between inflation and unemployment.
non-accelerating inflation rate of unemployment (NAIRU)
the lowest possible unemployment rate that will not cause the inflation rate to increase
demand pull inflation
occurs when the price level changes in response to changes in the business cycle
cost-push inflation
occurs when the price of a key input increases suddenly
