Econ-Chapter 8 Flashcards Preview

Fall 2016 > Econ-Chapter 8 > Flashcards

Flashcards in Econ-Chapter 8 Deck (34):
1

The true suppliers of loanable funds are

consumers and businesses that save, banks are intermediaries

2

interest rate

savers are paid for delaying consumption until the future, by borrowers, who wish to consume or invest more in the present and will later pay for that privilege-the price they pay is this

3

direct finance

a borrower deals directly with the lender
-selling of bonds

4

maturity

the date that the payment will be made to the lender

5

face value

the value paid at maturity

6

zero coupon bond

seller makes no interest payments

7

coupon rate

making interest payments twice a year until maturity, would have this quoted on it

8

indirect finance

when individuals and businesses use middlemen, such as banks, for borrowing and lending, they are engaging in this

9

financial intermediaries such as banks:

-spread the risk of non-payment
-develop comparative advantages in credit
-divide denominations of loans
-match time preferences

10

high interest rates

the greater rewards encourage more saving-larger quantity of loanable funds is supplied

the higher cost of consumption and investment discourages borrowing-a lower quantity of loanable funds is demanded

11

borrowers prefer what kind of interest rates

lower rates, and lenders would prefer higher

12

usury law

which puts a price ceiling on interest rates, it would cause a shortage in the market if the ceiling was below the equilibrium interest rate

13

us loans interest rate is

2.25% and mortgage is 4%

14

indirect crowding out

when an increase in government spending is financed through borrowing, private spending decreases due to the rising interest rates

15

direct crowding out

when government spends, private markets spend less because their ability to spend is taxed away

16

financial trades may create value because of differing abilities

one partner is motivation and sells a good, and the other partner is less motivated and buys the good. one partner finances while the other manages.

17

leveraged buyout

where a firm borrows in order to purchase another firm then immediately sells the firm in whole or in parts

18

finance moves money around , but it does so to more resources around from..

less valued uses to higher valued uses, resulting in an increase in the wealth of a nation and nearly always creating employment

19

insolvent

a firm whose value is negative-owes more than it owns

20

iliquid

a solvent firm may be forced to declare bankruptcy, because of this, cannot pay its immediate obligations

21

absolute priority rule

which the creditors are ranked with regard to how long ago the company became indebted to them, then every penny is paid to the senior debt, before any less senior debt is paid.

22

Fannie Mae (Federal National Mortgage Association)
and Freddie Mac (competeror)

was created to restart lending on housing after the crisis of housing prices from the great depression

23

The system of Fannie Mae and Freddie Mac

1. Mortgage loans to poor people
2. bank sells loan to freddie or fannie
3. poor people make payments to them
4. FM sell investors a share of the payments
5. the money to buy more mortgages with is returned to them

24

Community Reinvestment Act

became a law, which instructed banks to make loans to poor people, who could not get home loans before because the could not pay

25

noncomforming loans

HUD directed the FMs to purchase loans that banks made to risky borrowers who could not meet the old standards.
-this passed the risk of making loans to poor people to the FM

26

What was the result of the housing industry being over built?

-frannie and freddie failed and could not pay bondholders
-AIG failed as well
-state had to pay off debt to the bondholders

27

TARP ( Trouble Asset Relief Program)

$700 billion was given to pay off bad mortgage back bonds. BUT Paulson took the money and gave it to banks. Banks were forced to accept the money

28

Congress proposed remedy for the financial crises, the Dodd-Frank bill of 2010

created new government regulatory agencies
created new regulations
directed regulators to write additional regulations

29

The Dodd-Frank bill does NOT

restrict the FMs in any way

30

The Dodd-Frank Bill DOES

-Establish the Financial Stability Oversight Council
-Instituted Bailout Insurance
-Created the Consumer Financial Protection Bureau to Regulate consumer credit

31

Systemic Risks

risks to the entire financial system

32

Aftermath of the 2008 Crisis

brought together the value destruction that accompanies government insuring of loans and austrian businesses cycle theory on how fed money creation inflates bubbles. The bubble bursted

33

economic growth

a healthy economy's increased production of goods and services is atleast around 3% per year

34

the 2008 crisis was triggered by

contraction of money supply, bad housing policies, monetary expansion to fight the recession