Unit 10: Banks, Money, & The Credit Market Flashcards
Money
Facilitates exchange, can be used to purchase goods and services, accepted as payment
Wealth
Stock of things owned or value of that stock
Ex. Market value of home, car, land, assets, bonds, etc.
Human Capital
The stock of knowledge, skills, behavioral attributes, personal characteristics that determine labor productivity or earnings of an individual
Income
The amount of profit, labor earnings over a year
Maximum amount that can be consumed without changing your wealth
Earnings
Wages, salaries, or other income
Stock
Quantity measured at a point in time, but does not depend on time
Ex. wealth
Flow
Quantity measured per unit of time
Ex. Income and hourly wage
Depreciation
Loss in value of a form of wealth caused by passage of time or use
Consumption
How much you spend on consumer goods
Saving
When what is being spent is less than net income, savings take place and wealth rises
Investment
Expenditure on newly produced capital goods
Ex. Buildings, equipment, machinery
Interest Rate
Price of bringing some buying power forward in time
Diminishing Marginal Returns to Consumption
As you consume an additional unit of a good the value of that consumption declines
Pure Impatience
Characteristic of a person who values additional consumption of a good now over an additional consumption later
Caused by:
1. myopia (imagine satisfaction to be higher now than in future)
or
2. prudence (know you may not be around later)
Balance Sheets
Record of assets, liabilities, and net worth of an economic factor
Assets
Anything of value that is owned
Liability
Anything of value that is owed
Net Worth
Assets - Liabilities
Bank
Firm that creates money through bank deposits in the process of supplying credit
Central Bank (aka Commercial Bank Reserves)
Only bank that can create base money
Part of the government, and commercial banks usually have accounts here
Maturity Transformation
Practice of borrowing money short-term and lending it long-term
Ex. Bank takes deposits that it promises to repay at none or short notice and makes long term loans that can be repaid over years
Mortgage
Loan contracted by households and businesses to purchase property without paying total value at one time, includes interest
Liquidity Risk
Risk that an asset cannot be exchanged for cash rapidly enough to prevent financial loss
Default Risk
Risk that credit given as loans will not be repaid
