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Checkable deposits
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deposits in financial institutions against which checks can be written and ATM or debit cards can be applied
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Money aggregates
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measures of the economy's money supply
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M1
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the narrowest measure of the money supply, consisting of currency and coins held by the non-banking public, checkable deposits, and traveler's checks
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"Faking it"
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fake money; $20 bill is the most commonly forged in US, second is $100 (internationally)
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Savings deposits
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deposits that earn interest but have no specific maturity date
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Number of colors on $10 bill
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seven
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Time deposits
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deposits that earn a fixed rate of interest if held for the specified period, which can range from several months to several years; also called certificates of deposits (CDs)
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M2
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money aggregate consisting of M1 plus saving deposits, small denomination time deposits, and money market mutual funds
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M3
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a money aggregate consisting of M2 plus large-denomination time deposits
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Debit card
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cards that tap directly into the depositor's bank account to fund purchases; also called a check card, and usually doubles as an ATM card
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Asymmetric information
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a situation in which one side of the market has more reliable information than the other side
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Net worth
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assets minus liabilities
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Balance sheet
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a financial statement that shows assets, liabilities, and net worth at a given point in time; all these are stock measures; because assets must equal liabilities + net worth, the statement is in balance
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Asset
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anything of value that is owned
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Liability
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anything that is owed to another individual or institution
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Required reserves
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the dollar amount of reserves a bank is obligated by regulation to hold
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Required reserve ratio
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the ratio of reserves to deposits that banks are obligated by regulation to hold
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Excess reserves
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bank reserves exceed required reserves; go back to the treasury
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Liquidity
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a measure of the ease with which an asset can be converted into money without a significant loss of value
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Federal funds market
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a market for overnight lending and borrowing of reserves among banks; the market for reserves on account at the FED
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Federal funds rate
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the interest rate charged in the federal funds market; the interest rate banks charge one another for overnight borrowing; the FED's target interest rate
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Money multiplier
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the multiple by which the money supply increases as a result of an increase in fresh reserves in the banking system
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Simple money multiplier
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the reciprocal of the required reserve ratio, or 1/r: the maximum multiple of fresh reserves by which the money supply can increase
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Electronic banking/E-banking
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conducting banking transactions over the internet
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Open-market purchase
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the purchase of US gov't bonds by the FED to INCREASE the money supply
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Open-market sale
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the sale of US gov't bonds by the FED to REDUCDE the money supply
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Discount rate
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the interest rate the FED charges banks that borrow reserves
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Financial system
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the group of institutions in the economy that helps to match one person's saving with another person's investment; moves the economy's scarce resources from savers to borrowers; financial markets or financial intermediaries
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US Financial system
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made up of various financial institutions that help coordinate savers and borrowers
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Financial markets
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financial institutions through which savers can directly provide funds to borrowers (bond market and stock market)
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Bond
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a certificate of indebtedness; specifies the obligations of the borrower to the holder of the bond, an IOU; states date of maturity, principal; can be sold to someone else before maturity date
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Date of maturity
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it states when the loan will be repaid
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Principal
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buyer of the bond gives money in exchange for interest and eventual repayment
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Bond characteristics
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length of time until bond matures (term), credit risk
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Bond term
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length of time until bond matures; short term and long term
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Credit risk
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the probability that the borrower will fail to pay some of the interest or principal.
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Default
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failure to pay some of the interest of principal on a bond
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Safe bonds
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gov't bonds; pay low interest rates
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Financial intermediaries
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financial institutions through which savers can indirectly provide funds to borrowers
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Primary role of Banks
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save money, lower interest; provide loans, high interest
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Secondary role of banks
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facilitate purchases of goods and services by allowing people to write checks against their deposits; they create a special asset that people can use as a medium of exchange
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Mutual fund
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an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds
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Shareholder of mutual fund
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accepts all risks and return associated with the portfolio of stocks and bonds
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Benefit of mutual funds
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allows people with small amounts of money to diversify it; give people access to skilled professional money managers
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Mutual fund operating fee
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charged by companies for their services; usually between 0.5-2.0% of the assets per year
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Savings and investment
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important determinants of the long-run growth in GDP and standards of living
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Coordinators of economy's saving/investment
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bond market, stock market, banks, mutual funds
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Junk bonds
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issued by shaky corporations to raise money; pay high interest; best to check agencies (like Standard and Poor) to see rank of credit risk of this type of bond
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Tax treatment
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the way the tax laws treat the interest earned on the bond; most bonds are taxable
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Municipal bonds
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state and local bonds; do not require payment of federal income tax on the interest income; pay a lower rate
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The stock market
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firms sell stock to raise funds
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Stock
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a claim to partial ownership in a firm; represents ownership in a firm - a claim to the profits that the firm makes
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Equity finance
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a sale of stock to raise money
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Debt finance
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the sale of bonds - bondholders paid before stockholders
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Organized stock exchanges
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New York Stock Exchange, American Stock Exchange, NASDAQ; when a corporation issues stock b selling shares to the public, the shares are traded among stockholders here
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Stock price
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determined by supply and demand of stock in these companies; perceptions
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Stock index
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monitor the overall level of stock prices; average of a group of stock prices; prices reflect potential profitability, so stock indexes are closely monitored
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Dow Jones industrial average
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stock index since 1896; based on the stock of thirty major US companies
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Standard and Poor's 500 index
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type of stock index
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National savings
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total income in the economy that remains after paying for consumption and gov't purchases
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Private saving
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the income that households have left after paying for taxes and consumption
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Public saving
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the tax revenue that the gov't has left after paying for its spending
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Budget surplus
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an excess of tax revenue over gov't spending
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Budget deficit
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a shortfall of tax revenue from gov't spending
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Market for loanable funds
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the market in which those who want to save supply fund and those who want to borrow to invest demand funds
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Crowding out
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a decrease in investment that results from gov't borrowing
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Productivity
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the quantity of goods and services produced from each unit of support
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Physical capital
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the stock of equipment and structures that are used to produce goods and services
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Human capital
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the knowledge and skills that workers acquire through education, training, and experience
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Natural resources
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the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits
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Technical knowledge
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society's understanding of the best ways to produce goods and services
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Developing nations
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should concentrate on saving money toward capital investments, deferring the production of consumer goods to a later time BUT diminishing returns eventually set in
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Diminishing returns
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the property whereby the benefits from and extra unit of input declines as the quantity of input increases; higher savings rate leads to a higher level of productivity and income but not higher growth in these variables
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World bank
answer
human capital and Rule of Law constitute the largest share of wealth I virtually all countries
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Rule of Law index
answer
explains 57% of a country's intangible capital; Switzerland 99%, USA 91%, Nigeria 5.8%, Sub-Saharan Africa avg 28%
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World bank
answer
good schools and the rule of law are the keys to successful development
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The Dutch Disease
answer
...
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Society's standard of living
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depends on its ability to produce goods and services
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Productivity
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depends on physical capital per worker, human capital per worker, natural resources per worker, and technology knowledge
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Savings and investments
answer
invest in capital goods; emphasis on Capital over Consumption
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Diminishing returns
answer
the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
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Catch-up effect
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the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich; South Korea
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Investment from abroad
answer
domestic savings is important; so is abroad
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Foreign direct investment
answer
a capital investment that is owned and operated by a foreign entity
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Foreign portfolio investment
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an investment that is financed with foreign money but operated by domestic residents
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Role of world bank
answer
set up WWII, shares common goals with IMF
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Human capital investment
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as important as physical capital investment in relation to a country's long-run economic success
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Education
answer
positive externality
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Brain drain
answer
negative aspect of education; emigration of highly educated workers to other countries; reduces human capital stock
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Fogel
answer
as nutrition improves, so does worker's productivity; developed BMI
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Malnutrition
answer
still a problem in developing country; South Sudan
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Property rights and political stability
answer
should be protected by policy makers in order to achieve economic growth
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Property rights
answer
people's ability to exercise authority over the resources they own
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Inward-oriented policies
answer
attempt to increase productivity and living standards within the country by avoiding interaction with the rest of the world
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Outward-oriented policies
answer
international trade in goods and services can improve the economic well-being of a country's citizens; think Argentina vs South Korea, Singapore, Taiwan
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Knowledge
answer
a public good; found by R&D
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Research and Development (R&D)
answer
gov't plays a large role in this
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Patent system
answer
encourages research; exclusive right to produce a product for a number of years.
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