MACRO test 4 ch.11

pensions

a retirement program into which an employer pays a monthly amount to retired employees until they die

medium of exchange

a function of money in which goods and services are sold for money, then the money is used to purchase other goods and services

M2

A broader definition of money that includes "near monies" that are not as liquid as cash, including deposits in savings accounts, money market accounts, and money market mutual fund accounts. (also kinda includes small denomination (less than 100,00) time deposits and shares in retail money market mutual funds)

financial system

A complex set of institutions, including banks, bond markets, and stock markets, that allocate scarce resources (financial capital) from savers, those who are spending less than they earn, to borrowers, those who want to use the resources to invest in potentially profitable projects

Individual Retirement Arrangement (IRA)

A retirement plan, open to any working American, to which a person may contribute a specified amount each year.

1-keep credit card balances to a minimum 2-find lower cost borrowing opportunities (student or bank loans) 3-avoid applying for too many credit cards 4-never miss a minimum payment for any amount

Because of the high costs of having credit card debts its good to:

financial intermediaries

Financial firms (banks, mutual funds, insurance companies, security funds (brokerages), and pension funds) that acquire funds from savers and then lend these funds to borrowers (consumers, firms, and government).

vesting period

The minimum number of years a worker must be employed before the company's contribution to a retirement account becomes permanent. Suppose you put $1,000 in your 401K your employer will put $1,000 in too which is a 100% return on investment as long as the ___ __ has been satisfied (401k are also tax deferred so the employee doesn't have to pay income tax on anything)

tradeoff between risk and return

The pattern of higher risk assets offering higher average annual returns on investment than lower risk assets.

-economic outlook -incentives to save -income or asset prices -government deficits

a shift in the supply curve of loanable funds occurs when a factor increases or decreases the country's willingness to save such as changes in...

-investment tax incentives -technological advancements -regulations -product demands -business expectations

anything that changes the rate of return on potential investment will cause the demand for loanable funds to change such as...

money

anything that is accepted in exchange for goods and services or for the payment of debt

lower

are saving rates in the US (higher/lower) than in countries such as China, India, and France?

three primary functions of money in our economic system

as a medium of exchange, as a measure of value (unit of account), and as a store of value

income or asset prices

as income rises, people typically save more too. also if the value of my house goes up I may spend a little more because my asset is worth more-meaning I have more money yet income remains the same

50÷.08=625

assume that market interest rates rise to 8%. just how much would the typical investor now be willing to pay for this bond that returns $50 year?

more

compared to bonds, stocks tend to me (more/less) risky

yes ex) student debts from government have very low interest rates but credit cards have very high interest rates

do interest rates vary considerably on personal debts?

incentives to save

governments and companies offer incentives for individuals to save (4010k) if those change the amount of saving also changes

more savings supplied to the market

higher interest rates result in: (this results in an upward-sloping supply curve, and is another example of people reacting to incentives)

inversely. they go down

how are bond and interest rates related? when bond rates go up what happens to interest rates?

liquidity

how quickly, easily , reliably an asset can be converted into cash. Money is the most __ because it requires no conversion

A-savers B-borrowers

in the market for loanable funds, the supply curve represents (__A__) while the demand curve represents (__B__)

investment tax incentives

investment tax credits reduce tax payments for firms building new factories or buying new equipment. these laws give firms incentives to invest by increasing their after-tax rate of return and often are created in bad economic times with the expectations of a quick jolt to investment demand. this would shift the demand for loanable funds up and increases in business taxes would shift it back down

lower, higher

low risk results in a (higher/lower) ROI while a high interest rate results in a (higher/lower) ROI

the market for loanable funds

model that describes the financial market for saving and investment

unit of account

money provides a yardstick of money in which goods and services are sold for money, then the money is used to purchase other goods and services. measure of value. dollar prices give us a yardstick for measuring and comparing the value of goods and services

commodity money

money that consists of objects and materials (such as gold, silver, and trinkets) -value must be easily determined a -must be divisible so that change can be made -must be durable and portable -must be accepted by many people

fiat money

money without intrinsic value that is used as money because the government has decreed it to be money

A)

money's first and most important function is as a A) medium of exchange B) unit of account C) store of value

bonds

most loanable funds are in the form of corporate or government ___ because of the size of this market economists frequently look at financial markets from the viewpoint of supply and demands for ___

technological advancements

new technologies that increase productivity or create new products give businesses an incentive to increase production. increases demand for loanable funds (shift upward)

diversifying assets to reduce risk

pool funds from many savers and lend to many borrowers that way there is less risk and savers have access to their funds if they need them

teaser rate

promotional low interest rates offered by lenders for a short period of time to attract new customers and to encourage spending

reducing transaction cost

reductions on the expenses associated with finding, selecting, and negotiating contracts between individual savers and borrowers (its gonna cost money to have a contract drawn up and analyzed between me and ella)

more

riskier assets typically offer (more/less) returns (otherwise no one would choose to take such risks)

either choose financial assets with lower liquidity or choose assets that carry a higher level of risk

saving accounts are very low risk and have a very high liquidity but very low interest. in order to improve this savers have 2 options

seller, buyer

the __ agrees to pay the __ a fixed rate of interest (coupon rate) on the face value of the bond (usually $1,000 for a corporate bond, but often much larger values for government bonds) until a fixed date (the maturity date of the bond) for example, if a corporation issues a bond with a face value of $1,000 at a coupon rate of 5%, it agrees to pay the bondholder $50 per year until the maturity date of the bond

barter

the direct exchange of goods and services for other goods and services -restricted to primitive economies (ex: I give you a gallon of milk and you give me a dozen eggs)

Return on Investment (ROI)

the earnings, such as interest, or capital gains, that a saver receives for making funds available to others. it is calculated as earnings divided by the amount invested. -The primary difference among the many types of financial assets available

compounding effect

the effect of interest added to existing debt or savings leading to substantial growth in debt or savings over the long run (ex of why this is bad) lets say you borrow $1,000 at a 10% interest rate. After a year its only $100 in interest so the total would be $1,100 which isn't bad but lets say you go 30 years and don't pay it off. Your debt is now $17,449 and you have incurred $1,600 in interest alone

store of value

the function that enables people to save the money they earn today and use it to buy the goods and services they want tomorrow. tomatoes do not have this because they easily rot or bruise.

M1

the narrowest definition of money that measures highly liquid instruments including currency (banknotes and coins), demand deposits (checks), and other accounts that have check-writing or debit capabilities

reducing information costs

these are the reductions made on the expenses associated with gathering information on individual borrowers and evaluating their creditworthiness (Idk how safe it would be to give ella 80,000 but a financial institution would be able to figure that out)

a double coincidence of wants

this occurs in a barter economy when I find someone who not only has something I need but also wants something I have

1--[yield=(interest payment)/(price of bond)] 2--[price of bond=(interest payment)/(yield)]

what are the 2 formulas for perpetuity bonds

reduce information cost, reduce transaction cost, spread risk by diversifying assets

what are the three roles that financial institutions fulfill that facilitate the flow of funs to the economy

social security, pension plans, individual retirement arrangements

what are three ways to save other than employer sponsored retirement contribution funds?

coupon rate of the bond, maturity date of the bond, face value of the bond.

what does a buyer determine when discussing the contract between seller (the company or government) and buyer

credit card debt

what is the most common short-term loan?

interest

what is the reward for not spending money today. this allows them to have more money in the future

the interest rate

what keeps the the market for loanable funds in equilibrium between savers and borrowers

government deficits

when a government runs a budget surplus, additional loanable funds are provided to the market, increasing the supply of loanable funds. but because most of the time governments have budget deficits, the government becomes a borrower not a saver, decreasing supply of loanable funds, interest rates rise

business expectations

when business sentiment about the economy rises, firms will tend to increase their investment demand, which increases the demand for loanable funds. when business sentiment falls, investment demand decreases and so does demand for loanable funds.

more competitive, more quickly

when compared to most markets, financial markets are typically (more/less) competitive and often reach equilibrium (more/less) quickly if something changes in the market

product demand

when demand for a firm's product or service increases, the return on investment rises. This increases the demand for loanable funds. The opposite is true when product demand falls.

when you're younger

when do financial advisors suggest that you have a riskier portfolio age wise

regulations

when government regulations reduce corruption and instill confidence in firms and entrepreneurs, demand for investment will rise. but when regulations impose higher costs or make plant expansion difficult, the demand for investment will fall because the rate of return on investment is reduced

economic outlook

when households save because they fear a recession it increase the amount of money supplied to the market at all interest rates will increase. this shifts the supply of loanable funds to the right. interest rates will fall. similarly, if the recession ends people stop saving as much and the supply of loanable funds shifts back to the left

people who want to purchase goods and services (such as going to college, starting a business)

where does the demand for loanable funds come from?

it slopes downwards because when the interest rate is high, fewer projects will have a rate of return high enough to justify the investment

which direction does the demand curve slope in the market for loanable funds

Federal Reserve System (central bank of the US)

who measures the money supply?

because of low interest rates and inflation will decrease the spending value of that money

why is putting your savings in savings accounts or checking accounts or just keeping cash around not the best plan?

social security

you pay part of your salary so old people can get checks based on their working years and you get the same benefit when you are 62 although benefits are better if you wait until you are 67. Poor people complain because they are shorter life expectancies than rich people