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ECO1102 > Midterm 2 > Flashcards

Midterm 2 Flashcards

1
Q

financial market

A

a market in which people trade future claims on funds or goods.

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2
Q

Functions of a bank

A
  • 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
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3
Q

market for loanable funds

A

market in which savers, who have money to lend, supply funds to those who borrow for their investment spending needs.

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4
Q

savings

A

The portion of income that is not immediately spent on consumption of goods and services.

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5
Q

investment

A

spending on productive inputs such as factories, machinery, and inventories.

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6
Q

interest rate

A

the price of borrowing. the price charged by a lender to a borrower for the use of funds.

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7
Q

factors that shift the supply of savings (determinants of savings)

A
  • culture
  • social welfare policies
  • wealth
  • current economic conditions
  • expectations about future economic conditions
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8
Q

default

A

when a borrower fails to pay back a loan according to the agreed upon terms.

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9
Q

credit risk

A

the risk of a borrow defaulting on a loan

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10
Q

risk-free rate

A

the interest rate at which one would lend if there were no risk of default. Usually approximated by interest rates on Canadian government debt

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11
Q

credit spread / risk premium

A

the difference between the risk-free rate and the interest rate a particular investor has to pay

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12
Q

financial system

A

the institutions that bring together savers borrowers, investors, and insurers in a set of interconnected markets where people trade financial products

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13
Q

financial intermediary

A

institutions that channel funds from people who have them to people who want them

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14
Q

liquidity

A

a measure of how easily a particular asset can be converted quickly to cash without much loss of value.

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15
Q

diversification

A

process by which risks are shared among many different assets or people, reducing the impact of a particular risk on any one individual.

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16
Q

stock

A

a financial asset that represents partial ownership of a company. An equity asset.

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17
Q

dividend

A

a payment made periodically, typically annually or quarterly, to all shareholders of a company.

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18
Q

loan

A

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

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19
Q

bond

A

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.

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20
Q

securitization

A

turns many loans into a single larger asset thus reducing the risk to the lender of any individual borrower defaults on the loan

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21
Q

derivative (futures contract)

A

an asset whose value is based on the value of another asset, such as a home loan, stock, bond, or barrel of oil.

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22
Q

mutual fund

A

a portfolio of stocks and other assets, managed by a professional who makes decisions on behalf of clients

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23
Q

index fund

A

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.

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24
Q

specialized fund

A

mutual fund where the dude is researching specific companies and picking stocks they hope will earn higher returns than the market average.

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25
Q

pension fund

A

professional managed portfolio of assets intended to provide income to company retirees

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26
Q

market risk (systemic risk)

A

any risk that is broadly shared by the entire market of economy

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27
Q

idiosyncratic risk

A

unique to a particular company or asset

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28
Q

standard deviation

A

a measure of how spread out a set of numbers is

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29
Q

net present value (npv)

A

a measure of the current value of a stream of cash flows expected in the future

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30
Q

efficient-market hypothesis

A

market prices always incorporate all available information and therefore represent true value as correctly as possible. Only in a closed economy?

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31
Q

closed economy

A

an economy that does not interact with other countries’ economies

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32
Q

open economy

A

interacts with other countries’ economies

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33
Q

net capital flow

A

the difference between capital inflows and capital outflows

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34
Q

capital outflow

A

when money saved domestically is invested in another country

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35
Q

capital inflow

A

when savings from another country finance domestic investment

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36
Q

fundamental analysis

A

refers to finds out as much information as possible on the firms or governments that issue securities

37
Q

technical analysis

A

bases predictions for future security performance on past performance

38
Q

money

A

the set of all assets that are regularly used to directly purchase goods and services

39
Q

functions of money

A

store of value
medium of exchange
unit of account

40
Q

store of value

A

an item that represents a certain amount of purchasing power that is retained over time.

41
Q

medium of exchange

A

an item that can be used to purchase goods and services

42
Q

barter

A

to directly offer a good or service in exchange for a desired good or service

43
Q

unit of account

A

a standard unit of comparison

44
Q

intrinsic value

A

value unrelated to an items use as money

45
Q

commodity-backed money

A

any form of money that can be legally exchanged for a fixed amount of an underlying commodity

46
Q

fiat money

A

money created by rule, without commodity to back it

47
Q

demand deposits

A

funds held in banks that can be withdrawn by depositors at any time without advance notice

48
Q

reserves

A

the cash that a bank keeps in its vault

49
Q

reserve ratio (definition)

A

the ratio of the total amount of deposits at a bank to the amount kept as cash reserves.

50
Q

reserve ratio (formula)

A

amount kept
= ————————- x 100
amount deposited

51
Q

desired reserves

A

the amount the bank is desired to keep on hand

52
Q

excess reserves

A

any additional amount beyond the desired reserves that the bank chooses to keep in reserve

53
Q

money multiplier (definition)

A

the ratio of money created by the lending activities of the banking system to the money created y the governments central bank.

54
Q

money multiplier (formula)

A

1
= ———-
reserve ratio

55
Q

fractional-reserve banking

A

banking system in which banks keep on reserve less than 100% of their deposits

56
Q

money supply

A

the amount of money available in the economy

57
Q

M1

A

definition of money, includes cash (hard money) plus chequing account balances.

58
Q

M2

A

definition of money, includes M1, personal savings accounts, and non-personal notice deposits where money is locked away for a specified period of time.

59
Q

central bank

A

the institution ultimately responsible for managing the nations money supply and coordinating the banking system to ensure a sound economy

60
Q

monetary policy

A

actions by the central bank to manage the money supply, in pursuit of certain macroeconomic goals

61
Q

reserve requirement

A

the regulation that sets the minimum fraction of deposits banks must hold in reserve

62
Q

open market operations

A

sales or purchases of government securities by the central bank to or from banks on the open market.

63
Q

contractionary monetary policy

A

actions that reduce the money supply in order to decrease aggregate demand

64
Q

expansionary monetary policy

A

actions that increase the money supply in order to increase aggregate demand

65
Q

overnight rate

A

the interest rate at which banks choose to lend reserves held at the Bank of Canada to one another, usually just overnight

66
Q

liquidity preference model

A

explains that the quantity of money people want to hold is a function of the interest rate

67
Q

inflation

A

an overall rise in prices in the economy. each dollar becomes less valuable over time.

68
Q

deflation

A

an overall fall in prices in the economy

69
Q

core inflation

A

a measure of inflation that excludes goods with historically volatile prices

70
Q

headline inflation

A

a measure of inflation that includes goods with historically volatile items.

71
Q

overall inflation

A

a measure of inflation that includes virtually all of the goods that the average consumer purchases.

72
Q

aggregate price level

A

a measure of the average price level for GDP and is measured by either CPI or the GDP price deflator

73
Q

neutrality of money

A

the idea that aggregate price levels do not affect real outcomes in the economy

74
Q

quantity theory of money

A

the aggregate price level is determined by the money supply. That inflation/deflation are primarily the result of changes in money supply.

75
Q

velocity of money (definition)

A

the number of transactions in which a typical dollar is used during a given period.

76
Q

velocity of money (formula)

A

money supply

77
Q

menu costs

A

the cost of changing prices to keep pace with inflation

78
Q

shoe leather costs

A

the cost people must spend managing cash in the face of inflation

79
Q

nominal interest rate

A

the reported interest rate

80
Q

real interest rate (definition)

A

the interest rate adjusted for the effects of inflation

81
Q

real interest rate (formula)

A

nominal interest rate - inflation rate

82
Q

disinflation

A

a period during which overall inflation rates, while still positive, are falling.

83
Q

hyperinflation

A

extremely long-lasting and painful increases in the price level, usually enough to render currency completely valueless or close to it

84
Q

potential output

A

the total amount of output the country could reasonably produce if all of its people and capital resources were fully engaged

85
Q

output gap

A

when an economy’s actual output differs from its potential at some point in time

86
Q

Phillips curve

A

the negative relationship between inflation and unemployment.

87
Q

non-accelerating inflation rate of unemployment (NAIRU)

A

the lowest possible unemployment rate that will not cause the inflation rate to increase

88
Q

demand pull inflation

A

occurs when the price level changes in response to changes in the business cycle

89
Q

cost-push inflation

A

occurs when the price of a key input increases suddenly

ECO1102 (3 decks)

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