QUIZ 1 Flashcards
chapters 1-3
financial markets
markets in which funds are transferred from people and firms who have an excess of funds to people and firms who need funds
security
a financial instrument- a claim on the issuers future income or assets
three types of secuities
govt bonds, corporate bonds, 3 month treasury bonds
interest rate
price paid for the rental of funds
common stock
equity stock represents share of ownership in a corporation
share of stock
a claim on residual earnings and assets of the corporation
face value of a stock
explicit value of stock that has nothing to do with the market value of the stock
financial intermediaries
institutions that borrow funds from people who have saved and in turn make loans to people who need funds
banks
accept deposits and make loans
financial innovation
development of new financial products and services, can be important force for good by making the financial system more efficient, ex: e finance
financial crisis
major disruptions in financial markets that are characterized by sharp declines in asset prices and the failure of many financial and non financial firms
Monetary policy
monetary theory ties changes in the money supply to changes in aggregate economic activity and the price level
aggregate price level
avg price of goods and services in an economy
impact of continual rise in price level
inflation affects all economic players, data shows connection between money supply and price level
interest rates and monetary policy
management of money supply and interest rates is conducted by the fed, the rate of money growth is an important determinate of interest rate
fiscal policy
deals with govt spending and taxation budget deficit is the
budget deficit
excess expenditures over revenues for a particular year- any deficit must be financed by borrowing
budget surplus
excess of revenues over expenditures for a particular year
Foreign exchange market
determines the price of one currency in terms of another
forex market
where funds are converted from one currency to another
exchange rate
price of one currency in terms of another
GDP
most common reported measure of aggregate output is GDP, it is the market value of all final good and services produced in a country during the course of a year
aggregate income
total income of all factors of production from producing goods and services in the economy during course of a year
what does aggregate income equal
aggregate output
nominal GDP
values measured in current prices
real GDP
more reliable measure of economic production expresses values in terms of prices for an arbitrary base year, GDP is measured in constant prices is referred to real GDP which indicates values are measured with fixed prices
aggregate price level
measures avg prices in the economy
common aggregate price level measures
GDP deflator, PCE deflator, CPI
what is the function of financial markets
performs the essential function of channeling funds from economic players that have saved surplus funds to those how have shortage of funds
direct financing
borrowers borrow funds directly from lenders in financial markets selling them securities no intermediate in the transaction
how do financial markets promote efficiency
produce an efficient allocation of capital which increases production and directly improve wellbeing of consumers by allowing them to time purchases better
structure of financial markets
debt and equity markets, debt instruments, equities (dividends), primary and secondary markets, exchanges and OTC markets
Primary markets
not public markets, investment banks underwrite securities in primary markets
underwriting
when an individual or institution takes on financial wrist for a fee
secondary markets
public markets, brokers and dealers work in secondary markets
where is there more money, bonds market or stock market?
bonds market
OTC markets
no clearing house, clearing houses provide higher level of security, EX forex market, federal funds market
money markets
much more liquid, less volitile, deal w short term debt instruments
capital markets
more volitile, less liquid, deal with longer term debt and equity instruments
Foreign bonds
bonds sold in foreign country and denotes in that countries currency
german bond sold in japan in the yen
foreign bond
eurobond
bond denominated in currency other than that of the country of which it is sold
british company issuing a canadian bond sold in japan
eurobond
eurocurrencies
foreign currencies deposited in banks outside home country
eurodollars
US dollars deposited in foreign banks outside the US of in branches of US banks
what does the world stock market help with
helps finance corporations in the us and the us fed gov
function of financial intermediaries (indirect finance)
lower transaction costs, economies of scale, liquidity service, reduce exposure of investors to risk, risk sharring, diversification `
economies of scope
financial intermediaries can lower cost of information production for each service by applying one information resource to many different services but they can also create potential costs in terms of conflict of interest
what is a main benefit of financial intermedaries
allows small savers and borrowers to benefit from existance of financial markets
regulation of financial systems
done to increase information avaliable to investors and ensure soundness of financial intermedaries
increasing information avaliable to investors
reduces adverse selection and moral hazard problems, reduces insider trading (sec)
ensuring soundness of financial intermediaries
restrictions on entry, disclosure of information, restrictions on assets and activities, deposit insurance to avoid bank runs, limits on competition
money or money supply
anything that is generally accepted as payment for good and services or in repayment of debt
wealth
total collection of pieces of property that serve to store value (net wealth= what you have- what you owe)
income
flow of earnings per unit of time
functions of money
medium of exchange, unit of account, store of value
medium of exchange
eliminates trouble of finding a double coincidence of needs (reduces transaction costs) promotes specialization
to be considered a medium of exchange something must:
be easily standardized, widely accepted, divisable, easy to carry
unit of account
used to measure value in the economy
store of value
used to save, purchasing power over time, money is the most liquid of all assets but losses value during inflation
commodity money
valuable, easily standardized and divisable
fiat money
paper money, decreed by gov as legal tender
Bitcoin
electronic money- created by decentralized users when they use their computing power to verify and process transactions- does not function well as unit of account or store of value
M1
currency- most liquid asset
M2
adds to M1, other assets that are not very liquid
choice of monetary aggregate and policy makers
M1 and M2 can move in different directions in the short run, the long run market is more volitile in the short run market more transactions occur so SR market is more stable
