Module 3 - Key words Flashcards
Rational expectations is the assumption that…
that people, firms
and participants in financial markets form expectations of
the future by assessing the course of future expected policy
and then working out the implications for future output,
future interest rates, and so on.
Expected present discount value
Value today of an expected sequence of payments that are constructed from information of expected payments & Interest rates
Market recession
A recession is a period of declining economic performance across an entire economy that lasts for several months
Give two examples of non-human wealth
Housing wealth: The value of the house subtracted by mortage due.
Financial wealth: Stocks, bonds and saving accounts
Describe human- and total wealth
Human wealth: After tax labour income over working life
Total wealth: Calculated in terms of present value
Can be affected by our expectations;
-indirectly trough non-human wealth (Expected yields and dividends)
-Directly trough human wealth (Expectance of a high-paid job)
Future expected interest rate
Expected real interest rates are calculated based on nominal yields and inflation expectations
Private spending in the goods market depends on…
current and expected future output and on current and expected future real interest rates.
It’s the total money spent on final goods and services by individuals and households for personal use.
Expectations affect..
demand and, in turn, affect output.
Changes in expected future output or in the expected
future real interest rate lead to…..
changes in spending and
in output today.
By implication, the effects of fiscal and monetary policy
on spending and output depend on….
how the policy affects
expectations of future output and real interest rates.
How are bonds priced?
Since there can be no arbitrage, bonds are priced such that they take into account future expected interest rate.
The price of a 2-year bond takes into account two interest rates.
What does the yield-curve predict?
Recessions
Which two channels does firms finance through?
- Internal Finance
- External Finance
- Debt finance
- Equity Finance
A budget deficit reduction may lead to an increase rather than a decrease in..
output.
Internal Finance
Financial sources that exists within the business itself (earnings)
Credibility, which is the…
e perceived probability that the government will do
what it has promised when the time comes to do it.
Coupon bonds
Bonds that promise multiple payments before maturity and one payment at maturity
Coupon payments
Payments before maturity
Current yield
the ratio of the coupon payment to the price of the bond
What happens if the depreciation rate increases?
The expected present value of profits will fall
Treasury bills (T-bills)
Bonds with maturity of up to a year when they are issued
Treasury bonds
Bonds with maturity of 10 years of more
Discount factor/discount rate i
the rate at which you discount the interest rate
openness in goods
markets is the…
ability of consumers and firms to choose between
domestic goods and foreign goods.