unit 4 test Flashcards
financial sector:
individuals, businesses, and governments borrow and save so they need institutions to help
assets:
anything tangible or intangible that has value
interest rate:
the amount a lender charges borrowers for borrowing money
interest-bearing assets:
assets that earn interest over time
ex: bonds
investment:
business spending on tools and machinery
decreases in interest rate = increase in investments
liquidity:
the ease with which an asset can be converted to a medium of exchange
bonds:
(securities)
- loans or IUDs that represent debt that the government, businesses, or individuals must repay to the lender
stocks:
(equities)
- represent ownership of a corporation and the stockholder is often entitled to a portion of the profit paid out as dividers
bond prices and interest rates:
- bond prices and interest rates are inversely related
- when you buy a bond you want the interest rate to be as high as possible
the barter system:
goods and services are traded directly - there is no money exchanged
money:
anything that is generally accepted as payment for goods and services - money is NOT the same as wealth or income
wealth:
total collection of assets
income:
flow of earnings per unit of time
commodity money:
something that performs the function of money and has intrinsic value
fiat money:
something that serves as money, but has no other value or uses
three functions of money:
- medium of exchange
- a unit of account
- store of value
what makes money effective?
- generally accepted
- scarce
- portable and dividable
purchasing power of money:
the amount of goods and services a unit of money can buy
inflation:
decreases purchasing power
hyperinflation:
decreases acceptability
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M1 (highest liquidity):
- currency in circulation
- checkable bank deposits
- travelers checks
M2 (near-moneys):
- savings deposits
- time deposits
- money market funds
fractional reserve banking:
when banks hold a portion of deposits to cover potential withdrawals and then loans the rest of the money out
demand deposits:
money deposited into a commercial bank in a checking account
required reserves:
the percent that banks must hold by law
excess reserves:
the amount that the bank can loan out
asset:
something you own
liability:
something you owe
balance sheet:
a record of a bank’s assets, liabilities, and net worth
the demand for money:
- transaction demand for money: people hold money for everyday transactions
- asset demands for money: people hold money since it is less risky than other assets
money demand shifters:
- change in price level
- change in consumer income
- change in technology
the supply of money:
- the U.S. money supply is set by the central bank and is independent from the interest rate
- vertical line
monetary policy:
the fed is a nonpartisan government office that adjusts the money supply to influence the economy
how changes in the money supply affect aggregate demand:
increasing the money supply:
increase money supply = decrease interest rate, increase investment, increase AD
decreasing the money supply:
decreasing the money supply = increase interest rate, decrease investment, decrease AD
three shifters of money supply:
- the reserve requirement
- the discount rate
- open market transactions
fractional reserve banking:
only a small percent of your money is held in reserve - the rest of your money has been loaned out
the reserve requirement:
% of deposits that banks must hold in reserve
if there is a recession, the Fed should:
decrease reserve ratio:
- banks hold less money and have more excess resources
- banks create more money by loaning out excess:
- money supply increases, interest rates fall, AD increases
if there is inflation, the Fed should:
increase reserve ratio:
- banks hold more money and have fewer excess resources
- banks create less money
- money supply decreases, interest rates go up, AD decreases
the discount rate:
the interest rate that the Fed charges commercial banks
to increase the money supply the Fed should:
- decrease the discount rate
- buy government securities
to decrease the money supply, the Fed should:
- increase discount rate
- sell government securities
open market operations:
when the Fed buys or sells government bonds (securities) - this is the most important and widely used monetary policy
federal funds rate:
interest rate that banks charge one another for one-day loans of reserves
monetary policy and AD-AS:
increasing the money supply:
- interest rate decreases
- investment increases
- AD, GDP, and PL increases
monetary policy and AD-AS:
decreasing the money supply:
- interest rate increases
- investment decreases
- AD, GDP, and PL decreases
real interest rate:
borrowers and lenders focus on the real interest rates since it represents their real rate of return
savings:
savings is what makes lending possible so the supply of loanable funds is the amount of money that is saved
national savings:
public and private savings
foreigners and supply:
foreigners also lend so the supply of loanable funds also depends on the amount of money that enters or leaves the country
capital inflow:
the amount of money entering the country
capital outflow:
the amount of money leaving the country
net capital inflow:
inflow - outflow
a change in net capital inflow will shift the supply of loanable funds
investing and demand:
borrowing = the demand of loanable funds
private investment:
borrowing by businesses and consumers
government borrowing:
deficit spending when government spending is greater than tax revenue
loanable funds market
demand for loans come from:
supply for loans come from:
- borrowers/investors
- lenders/savers
loanable funds market:
demand shifters:
- change in borrowing by consumers
- change in borrowing by businesses
- change in borrowing by government
loanable funds market:
supply shifters:
- change in private savings behavior
- change in public savings
- change in foreign investments
