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Econ 102 > Exam 2 > Flashcards

Exam 2 Flashcards

(94 cards)

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1
Q

Define Investment

A

incur some upfront cost today in hopes of receiving future-benefits

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2
Q

Macroeconomics definition of investment

A

spending on new capital assets that increase the economy’s productive capacity

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3
Q

Define saving

A

the money you have leftover after paying for your spending

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4
Q

capital stock

A

total quantity of capital at a point in time

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5
Q

Define business investment

A

spending by businesses on new capital investments

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6
Q

Define inventories

A

raw materials, work in progress, unsold goods

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7
Q

Housing investment

A

spending on building new houses or apartments as well as improvements to existing housing

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8
Q

Compound interest

A

you earn interest not only on your initial deposit but also on your previously earned interest, so your wealth compounds

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9
Q

Define present value

A

amount of money that you’d invest today in order to produce an equivalent benefit in the future

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10
Q

depreciation rate

A

the proportion of an investment’s remaining productive capacity you lose each year due to depreciation

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11
Q

Rational rule for investors

A

pursue an investment opportunity if the present value of future revenue exceeds the up-front cost

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12
Q

Factors that shift investment

A

interest rates, rational rule for investors:

  • technological advances
  • expectations
  • corporate taxes
  • lending standards and cash reserves
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13
Q

Define market for loanable funds

A

market for funds used to buy, rent, or build capital

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14
Q

what does the market for loanable funds determine?

A

long-run real interest rate and the quantity of investment

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15
Q

the price of a loan is equal to what

A

real interest rate

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16
Q

Define neutral real interest rate

A

interest rate that operates when the economy is in neutral (producing neither above/below its potential)

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17
Q

How is supply shifted in the loanable funds market?

A

If there is a change in savings by those who supply loanable funds–> private savers, government, foreigners

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18
Q

Specific shifts in supply of loanable funds

A
  • changes in personal savings rates
  • budget deficit or surplus shifts gov. spending
  • Global shocks shift foreign saving
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19
Q

Specific shifts in demand of loanable funds

A
  • techological advances
  • expectations
  • corporate tax
  • Easier lending standards/ cash reserves
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20
Q

Three types of investment

A

business, inventories, and housing investment

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21
Q

Define crowding out

A

phenomena where government needs to borrow money and crowd out money that could have been used by firms

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22
Q

How does the bank earn profit?

A

By putting your money to work after you put it in a bank

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23
Q

Functions of banks

A
  • pool savings from many savers
  • spread the risk of lending money across many borrowers
  • solve information problems
  • provide payment services
  • create long-term loans from short-term deposits
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24
Q

Define maturity transformation

A

using short-term loans to make long-term loans– ensures investors can fund long-term projects

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25
Bank run
occurs when many customers try to withdraw their savings at the same time--> can cause a bank to collapse
26
Fire sale
a quick sale due to financial distress
27
Deposit insurance
makes bank runs less likely and ensures you will always get your savings back even if your bank collapses
28
shadow banks
not real banks not covered by deposit insurance
29
Bond market
where the "big dogs" go to borrow the big bucks
30
Bond
an IOU that spells out the terms of a loan
31
Borrower is also known as
the issuer
32
The principal
how much money has to be repaid
33
The maturity date
when the loan must be repaid
34
Coupons
the interst promised to be payed
35
Functions of the bond market
- Channels funds from the savers to the borrowers - Funds gov. debt - Spreads risk by issuing money to many companies - Creates liquidity
36
Liquidity
the ability to quickly and easily convert your investments to cash with little or no loss in value
37
Default risk
cost of not getting paid-- assigns credit ratings to businesses to ensure this does not happen
38
Term risk
arrises when there is uncertainty about future interest rates
39
Liquidity risk
when your bond will be hard to sell--> need to sell an asset quickly, might not be able to get a good price for it
40
What is the safest investment
US gov bonds
41
What does a stock represent
partial ownership in a firm-- when you own a stock in a company, you own a share in that company
42
Dividends
tallies up its profits and pays some as dividends
43
retained earnings
profits not sent out as dividends which are reinvested into the company
44
Functions of stocks
- channel funds from savers to investors - reallocate control - creates liquidity and makes it easier to own stocks
45
IPO
initial public offering of stock to potential investors
46
stock price
how much a company is worth
47
stock price chart
shows how risky a stock is over time
48
Market capitalization
value of the entire company
49
Efficient market hypothesis
at any point in time, financial prices reflect all publicly available information. - Impossible to predict the stock's value - Financial prices move unpredictably
50
Federal funds rate
rate banks charge each other for overnight loans
51
Reserve requirements
minimum amount of reserves that each bank must hold
52
Open market trading desk
where fed buys and sells gov. bonds overnight w agreement to buy back next day at a higher price
53
Floor framework
floor on how low of an interest rate a financial institution will be willing to lend another
54
Discount rate
banks offer collateral and get a loan from the fed that helps them meet the reserve requirements
55
Yield
a way of measuring expected returns from a bond
56
What is a treasury bond used for
to pay for deficit spending
57
Speculative bubbles
the price of an asset rises above its fundamental value (highly inflated prices)
58
Greater fool theory
you can always find someone else to buy your stock
59
Mutual funds
a fund that buys a portfolio of stocks and bonds on your behalf
60
Index funds
A mutual fund that consists of a broad market index
61
Excess reserves
amount banks have on their reserves above the required amount creates a minimum interest floor
62
Globalization
increasing global integration of economies, cultures, political institutions and ideas
63
Financial inflows
foreigners investing in the United states--> funds flow into the U.S.
64
Financial outflows
Americans investing their money in other countries--> funds flow out of the U.S.
65
Financial flows
investment in foreign physical assets financial assets and loans
66
Portfolio investment
foreigners buy american stocks or bonds
67
Deposits and loans
foreigners lend money to americans
68
when financial flows start rising
- countries remove capital controls - Deregulation of the financial sector - Large institutional investors - Technology - Financial innovation
69
Appreciate
currency becomes more expensive
70
Depreciate
currency becomes cheaper
71
Shifts in demand currency
- Exports from the U.S. - Strengths of the global economy - Barriers to trade in foreign market - Domestic innovation and marketing - Foreign Prices - Domestic prices - Financial inflows in the U.S. - interest rate differentials - Business profitability - Political risk - Expected exchange rate movements
72
Shifts in supply currency
- Imports in the U.S. - strength if the domestic economy - trade barriers protecting domestic producers - foreign innovation and marketing - domestic prices - foreign prices - Financial outflows from the U.S. - interest rate differentials - business profitability - political risk - expected exchange rate movements
73
What does the real exchange rate measure?
(un) competitiveness of american products | - low real exchange rate means goods are competitive
74
real trade-weighted index
evaluates American competitiveness relative to a weighted average of dozens of our most important trading partners
75
Quantitative anchoring
prices in the previous period is an anchor for what you think prices would be next period
76
Moral anchoring
psychological thinking says most of what determines human thinking is a result of stories and justification, not numbers
77
Absolute advantage
being the most efficient in finishing a task
78
Comparative advantage
the ability to do a task at a lower opportunity cost
79
What factors shape comparative advantage?
- Having abundance of certain resources/inputs - Develop a specialized skill - Exploit the benefits of mass production
80
Foreign direct investment
a new building/company or plant, other physical assets
81
Purchasing power parity
two currencies can buy the same amount of goods
82
Aggregate expenditure
describes everyone's spending plans
83
When does the macroeconomic equilibrium occur
when aggregate expenditure is equal to GDP
84
short-run
year to year ups and downs
85
long-run
economy's potential output
86
potential output
level at which all resources are fully employed
87
output gap
measures the gap between actual and potential output a a percentage of potential output
88
IS curve
illustrates the link between interest rates, GDP and the output gap
89
MP curve
how changes in the risk premium affect the real interest rate
90
Multiplier
summarizes effect of an initial burst of spending on output
91
Positive output gap
economy is overheating, producing too much
92
Negative output gap
some resources are not used to full capcity
93
Okun's rule
for every percentage point that actual output falls below potential output the unemployment rate is around half a percentage higher
94
Who determines the risk premium
financial markets

Econ 102 (3 decks)

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