ECON credit and banking HW review

Categories that balance with Stockholders

longterm debt demand deposits stockholders equity shortterm borrowing

Categories that balance with Assets

longterm investments reserves and cash equivalents

and the​ inflation-adjusted purchasing power of the originally borrowed dollar is

1+pi

Which of the following can produce a movement along the credit demand ​curve?

A change in the real interest rate.

A shift in the credit demand curve can be caused by

changes in government policy, changes in perceived business opportunities for firms, and changes in household preferences or expectations.

2 basic types of financial capital are

credit and equity

If the economy experiences an unexpectedly low rate of inflation, the group that would tend to benefit is

creditors (people or institutions that are owed money)

Banks and other financial institutions of an economy are in the business of channeling funds from suppliers of financial capital to users of financial capital. This process is known as​

financial intermediation

The credit supply curve sloped upward because

higher real interest rate discourages current consumption, and higher real interest rate encourages more saving.

If pi denotes the rate of inflation and i denotes the nominal rate of​ interest, then the amount a borrower repays in a year on a​ one-dollar loan is and the​ inflation-adjusted purchasing power of the originally borrowed dollar is

1+i

What is the formula to find the real rate of interest?

Real interest rate= nominal interest rate-inflation rate

What is the difference between nominal and real interest rates?

The nominal interest rate is the rate you pay on a loan. The real interest rate is the nominal interest rate adjusted for inflation.

Why do the inflation rate and the nominal interest rate tend to move together over the long-run?

This synchronized movement indicates that credit market conditions have tended to be relatively stable over time. Also their up and down movement together tells us that the real interest rate is relatively stable in the long-run.

The credit demand curve slopes downward because

a higher real interest rate reduces a borrowing firm's profit and hence its willingness to borrow.

A shift in the credit supply curve can be caused by

an elevated perception on the part of household that the future may hold many "rainy days", and aging population that is ill-prepared for retirement, and a heightened desire on the part of firms internally fund their future activities.

The​ inflation-adjusted purchasing power of the originally borrowed dollar is subtracted from the amount a borrower repays in a year on a​ one-dollar loan. The result is the​

real price of the loan, real interest rate, and ​inflation-adjusted cost of the loan.