Unit 4 Flashcards
Liquidity
ease with which a financial asset can be accessed and converted into cash
rate of return
Net gain or loss of an investment over a specified time period
bonds (securities)
An interest-bearing asset often issued by businesses or the government
stocks (equities)
A security that gives you ownership in a company.
equity financing
ownership interest in property that may be offset by debts or other liabilities
What is the financial sector
a network of institutions that link borrowers and lenders
assets
tangible and intangible items that have value
interest rate (def)
price of a loan
interest bearing assets
assets that earn interest over time
what is the relationship between bond price and interest rates?
inverse
real IR def
percentage increase in purchasing power that a borrower pays (adjusted for inflation)
real interest rate formula
real IR= nominal IR - expected Inflation
nominal IR
percentage increase in money that a borrower pays
nominal IR formula
nominal IR= real IR + expected inflation
Double coincidence of wants
(barter system) before trade could occur, one had to have an item the other wanted
money
anything generally accepted as payment for goods/services
commodity money
something that performs the function of money and has an intrinsic value
Fiat Money
something that serves as money but has no other value
purchasing power of money
amount of goods/services that a unit of money can buy
Reserve requirement
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)
money multiplier formula
1/
reserve ratio
fractional reserve banking
when banks hold a portion of deposits to cover potential withdrawals and then loan out the rest of the money
demand deposits
money deposited in a commercial bank in a checking account
required reserves
percent that banks must hold by law
excess reserves
amount that banks can loan out
balance sheet
record of a bank’s assets, liabilities, and net worth
3 shifters of money supply
- Reserve ratio/requirements
- Discount rates
- Open market operations
Discount rate
interest rate the fed charges commercial banks
open market operations
when the fed buys or sells govt. bonds. It is the most important and widely used policy
federal funds rate
interest rate banks charge one another for one-day loans or reserves. it is set by the banks
transaction demand for money
people hold money for everyday transactions
asset demand for money (why do people hold onto money)
people hold onto money since it’s less risky than other assets
what is the relationship between interest rates and quantity of money demanded?
inverse
loanable funds market
shows the supply and demand of loans and shows the equilibrium real interest rate
private saving
amount households save instead of consume
public saving
amount govt. saves instead of spends
national savings
public and private savings
capital inflow
amount of money entering the country
capital outflow
amount of money leaving the country
net capital inflow formula
inflow - outflow
private investment
borrowing by businesses and consumers, deficit spending
money supply shifters (3)
- change in private savings behavior
- changes in public savings
- changes in foreign investment
money demanded shifters (3)
-price level
-real gdp
-transaction costs
why is the supply of money a straight line
it is constant
