Unit 4: Financial Sectors

the total sum of domestic savings by households

formula for private savings

formula for public savings (budget balance)

when government expenditures and transfers exceeds tax revenues - gov needs to issue bonds to borrow in order to pay for a portion of its spending - budget balance is negative

when tax revenues exceed government expenditures and transfers allowing the government can lower its long-term debt - budget balance is positive

when tax revenues equal government expenditures exactly

the sum of the budget balances over the years

formula for net capital inflow

when a foreigner saves in the US via treasury bonds, stocks, etc

when a domestic household saves in a foreign market via stocks, government bonds, etc.

a nations total level of savings = _______ spending for ______

national savings formula

the price of a loan stated as a percent of the principal (the amount borrowed)

how likely the borrower (in a loan) is to default

to not pay back a loan

the higher inflation is expected to be, the higher the interest rate

interest rate paid on a loan

nominal interest rate adjusted to account for changing price levels

formula for real interest rate

borrowers like _______ because it _____the real interest rate

lenders like _____ because it ______ real rate of interest, giving more power to the dollar

a hypothetical market that brings together those who want to lend money and those who want to borrow

shifters of demand for loanable funds (2)

______ supply loanable funds to earn interest (like a higher interest rate)

shifters of supply of loanable funds

who supplies funds?

who demands funds?

a financial institution that accepts deposits and makes loans; also known as depository institutions and commercial banks

a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal

our nation’s central bank - regulates commercial banks by distributing loans and receiving deposits and selling/purchasing treasury bonds

a minimum percentage of all deposits that banks must keep on hand to meet their depositor’s demands

tool the Fed uses to control the money supply of the US to either reduce the price level in an inflationary period or increase employment in a recessionary period

a method for analyzing a business’ assets and liabilities

a future economic payment (money promised to the bank in the future)

a future economic obligation (money the bank must pay out in the future)

assets must _____ liabilities

money that customers put into their bank account

a percentage/portion of customer deposits that banks are legally obligated to keep on hand by the Fed

reserves that are above the required reserve ratio that a bank can lend out or use to purchase treasury bonds

government bonds with a term under a year - these can be purchased by banks using excess reserves to earn interest from the Fed

money (profit) owed to the owners of the bank (shareholders) - if bank collects interest when loans are repaid, that interest is added to this and excess reserves

total amount of money in circulation or in existence in a country

the broadest definition of money supply (money that includes all currency) cash, coins, deposits in checking accounts, and travelers checks

the sole controller of the American money supply

when you put ______ into a checking account you can create ____ _______ and increase M1

money multiplier formula

when interest rate is lower, people are more likely to hold their wealth as _____ because it is more ______

theory that states that equilibrium interest rate determined by the supply and demand of money

shifters of money demand (change in…— 5)

shifters of money supply (2)

the Board of Governors and Chairperson in the Federal Reserve are chosen by the _________

what is the dual mandate for the federal reserve board of governors ?

rate at which commercial banks lend to each other but affects all other interest rate

in expansionary monetary policy, the Fed is targeting ___________

in contractionary monetary policy, the Fed is targeting __________

when the Fed buys or sells T-Bills to its' member commercial banks

Fed is buying T-Bill from a commercial bank

the interest rate set by the Federal Reserve for lending to other banks

other monetary tools the Fed can use (3)

 a scenario in which the central bank adds money into the market with the goal of stimulating the economy, but fails to lower the interest rates because the interest rate is already reaching or is zero

 when commercial banks can deposit reserves ($) in the Fed and earn interest