Unit 4

Question 1

Liquidity

Answer 1

ease with which a financial asset can be accessed and converted into cash

Question 2

rate of return

Answer 2

Net gain or loss of an investment over a specified time period

Question 3

bonds (securities)

Answer 3

An interest-bearing asset often issued by businesses or the government

Question 4

stocks (equities)

Answer 4

A security that gives you ownership in a company.

Question 5

equity financing

Answer 5

ownership interest in property that may be offset by debts or other liabilities

Question 6

What is the financial sector

Answer 6

a network of institutions that link borrowers and lenders

Question 7

assets

Answer 7

tangible and intangible items that have value

Question 8

interest rate (def)

Answer 8

price of a loan

Question 9

interest bearing assets

Answer 9

assets that earn interest over time

Question 10

what is the relationship between bond price and interest rates?

Answer 10

inverse

Question 11

real IR def

Answer 11

percentage increase in purchasing power that a borrower pays (adjusted for inflation)

Question 12

real interest rate formula

Answer 12

real IR= nominal IR - expected Inflation

Question 13

nominal IR

Answer 13

percentage increase in money that a borrower pays

Question 14

nominal IR formula

Answer 14

nominal IR= real IR + expected inflation

Question 15

Double coincidence of wants

Answer 15

(barter system) before trade could occur, one had to have an item the other wanted

Question 16

money

Answer 16

anything generally accepted as payment for goods/services

Question 17

commodity money

Answer 17

something that performs the function of money and has an intrinsic value

Question 18

Fiat Money

Answer 18

something that serves as money but has no other value

Question 19

purchasing power of money

Answer 19

amount of goods/services that a unit of money can buy

Question 20

Reserve requirement

Answer 20

Amount of funds that a bank holds in reserves to ensure that it is able to meet all liabilities in case of sudden withdrawals (demand deposits only)

Question 21

money multiplier formula

Answer 21

1/
reserve ratio

Question 22

fractional reserve banking

Answer 22

when banks hold a portion of deposits to cover potential withdrawals and then loan out the rest of the money

Question 23

demand deposits

Answer 23

money deposited in a commercial bank in a checking account

Question 24

required reserves

Answer 24

percent that banks must hold by law

Question 25

excess reserves

Answer 25

amount that banks can loan out

Question 26

balance sheet

Answer 26

record of a bank’s assets, liabilities, and net worth

Question 27

3 shifters of money supply

Answer 27

1. Reserve ratio/requirements
2. Discount rates
3. Open market operations

Question 28

Discount rate

Answer 28

interest rate the fed charges commercial banks

Question 29

open market operations

Answer 29

when the fed buys or sells govt. bonds. It is the most important and widely used policy

Question 30

federal funds rate

Answer 30

interest rate banks charge one another for one-day loans or reserves. it is set by the banks

Question 31

transaction demand for money

Answer 31

people hold money for everyday transactions

Question 32

asset demand for money (why do people hold onto money)

Answer 32

people hold onto money since it’s less risky than other assets

Question 33

what is the relationship between interest rates and quantity of money demanded?

Answer 33

inverse

Question 34

loanable funds market

Answer 34

shows the supply and demand of loans and shows the equilibrium real interest rate

Question 35

private saving

Answer 35

amount households save instead of consume

Question 36

public saving

Answer 36

amount govt. saves instead of spends

Question 37

national savings

Answer 37

public and private savings

Question 38

capital inflow

Answer 38

amount of money entering the country

Question 39

capital outflow

Answer 39

amount of money leaving the country

Question 40

net capital inflow formula

Answer 40

inflow - outflow

Question 41

private investment

Answer 41

borrowing by businesses and consumers, deficit spending

Question 42

money supply shifters (3)

Answer 42

1. change in private savings behavior
2. changes in public savings
3. changes in foreign investment

Question 43

money demanded shifters (3)

Answer 43

-price level
-real gdp
-transaction costs

Question 44

why is the supply of money a straight line

Answer 44

it is constant