Module 22 Flashcards
interest rate
price, calculated as percentage of amount borrowed, charged by lenders to borrowers for the use of their savings for one year
savings-investment spending identity
savings and investment are always equal for the economy as a whole
budget surplus
savings by government when tax revenue > government spending
budget deficit
government dissavings when tax revenue < government spending
budget balance
difference between tax revenue and govt spending
national savings
private savings + budget balance
disposable income - taxes) + (tax revenue - govt spending
capital inflow
inflow of foreign funds - outflow of domestic funds
savings equation for open country
savings = investment = national savings + capital inflow
wealth
value of accumulated savings, invested in financial markets
financial asset
paper claim that entitles the buyer to future income from the seller
physical asset
a claim on a tangible object that gives the owner the right to dispose of the object as he wishes
three tasks of the financial system
1) reducing transaction costs
2) reducing risk (via diversification)
3) providing liquidity
liquid
an asset is liquid if it can be quickly converted into cash without much loss of value
loan
lending agreement between individual lender and individual borrower
-high transaction cost
bond
IOU by borrower, usually with interest
-lower transaction cost than loan
default
when a borrower fail to make payments as specified by the loan or bond contract
stock
shared ownership of a company
financial intermediary
institution that transforms the funds it gathers from many individuals into financial assets
ex: mutual fund, pension fund, life insurance, banks
mutual fund
intermediary that creates a stock portfolio and then resells shares of the portfolio to individuals
pension fund
type of mutual fund that holds assets in order to provide retirement income to its members
life insurance companies
sell policies that guarentee a payment to the holder’s beneficiaries when the holder dies –> reduces risk
bank
intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance illiquid investment spending needs of borrowers
FDIC
insures depositors in banks up to $250000
