Midterm Ch. 1-5 Terms and Definitions
Midterm Ch. 1-5 Terms and Definitions ECO 315
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This 5 page Study Guide was uploaded by Shannon Panagopoulos on Friday October 16, 2015. The Study Guide belongs to ECO 315 at DePaul University taught by Mondschean in Fall 2015. Since its upload, it has received 124 views. For similar materials see Intro to Money and Banking in Economcs at DePaul University.
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Date Created: 10/16/15
Mishkin Ch 1 Terms 1 Aggregate output the total production of nal goods and services in the economy 2 Aggregate Price Level the average price of goods and services in the economy Asset any nancial claim or piece of property subject to ownership Banks nancia institutions that accept deposits and make loans Bond a debt security that promises to make periodic payments for a speci ed period of time 6 Budget de cit an excess of government spending over tax revenues 7 Budget surplus tax revenues exceed government expenditures 8 Business cycles the upward and downward movements of aggregate output in the economy 9 Central bank organization that conducts a nation39s monetary policy 10Common stock a share of ownership of a corporation 11E nance delivery of new nancial products electronically 12Federal Reserve System quotThe Fedquot the US central bank responsible for monetary policy 13Financial crises major disruptions in nancial markets characterized by sharp decline in asset prices or failure of many nancial rms 14Financial innovation the development of new nancial products and services 15Financial intermediaries institutions that borrow from other people who have saved and then lend to others 16Financial markets markets in which funds are transferred from people who have a surplus of funds to those who have a shortage of funds 17Fiscal policy making decisions on government spending and taxation 18Foreign Exchange Market the market in which one currency is exchanged for another 19Foreign exchange rate the price of one currency in terms of another 20GDP the market value of all the nal goods and services produced within a country over a year 21ln ation the condition of a continuously rising price level 22ln ation rate the rate of change of price level 23lnterest rate the cost of borrowing or the price paid for the rental of funds expressed as a percent per year 24Monetary Policy the management of the money supply and interest rates 25Monetary theory the theory that relates monetary policy to changes in economic activity and in ation 26MoneyMoney suppy anything that is generally accepted in payment for goods and services or in the repayment of debt 27Recession periods of declining aggregate output 28Security a claim on the borrower s future income that is sold by the borrower to the lender 29Stock a security that is a claim on the earnings and assets of a company 30Unemployment rate the percentage of labor force not working mes Mishkin Ch 2 Terms 1 Adverse Selection the problem created by asymmetric information before a transaction occurs when the people who are most undesirable from other party39s point of view are the ones who are most likely to want to engage in the nancial transaction Asset Transformation turning risky assets into safer assets Asymmetric Information the unequal knowledge that each party to a transaction has about the other party Brokers agents for investors who help match buyers and sellers Capital wealth that is used to produce more wealth Capital Market a nancial market in which longerterm debt and equity instruments are needed 7 Con icts of interest can arise when nancial institution provides multiple services leading to misleading or concealing of some information 8 Currency paper money or coins 9 Dealers those who buy and sell securities at a speci ed price or buyers and sellers 10Default occurs when an institution is unable to make interest payments or pay off the amount owed on a debt instrument at maturity 11Diversi cation investing in a portfolio whose returns do not always move together with the result that overall risk ls lower for individual assets 12Dividends periodic payments to shareholders 13Economies of Scale the reduction in transaction cost per dollar of transaction as the scale of transactions increases 14Economies of Scope the ability to use one resource to provide many different products and services 15Equities claims to share in net income and assets of a corporation such as common stock 16Eurobond bonds denominated in a currency other than that of the country where they were sold 17Eurodollar US dollar deposited in foreign banks outside of the US or on foreign branches of US banks 18Exchanges secondary markets in which buyers and sellers of securities meet in one central location and conduct sales 19Federal Funds Rate the interest rate banks charge other banks on overnight loans 20Financial lntermediation the process of indirect nance by which nancial intermediaries link lendersavers and borrowspenders 21Financial Panic a widespread collapse of nancial markets and intermediaries 22lnvestment Bank rms that assist in the initial sale of securities in the primary market 23Liabilities debts or nancial obligations that must be repaid 24Liquid easily converted to cash 25Maturity the expiration date of a debt instrument UJN owe 26Money Market a nancial market in which only shortterm debt instruments are traded 27Moral Hazard the risk that one party to a transaction will engage l behavior that is undesirable from the other39s point of view after transaction 280TC market a secondary market in which dealers at different locations who have an inventory of securities stand ready to buy and sell securities to anyone who comes to them and is willing to accept their prices 29Portfolio a collection or group of assets 30Primary Market a nancial market in which new issues of a security are sold to initial buyers 31Risk Sharing occurs when rms create and sell assets that are less rislq and use proceeds to buy riskier assets 32Secondary Market a nancial market in which securities that have been previously issued can be resold 33Thrift institutions thrifts savings and loans mutual savings banks and credit unions 34Transaction Costs the time and money spend trying to exchange nancial assets goods or services 35Underwriting guaranteeing prices on securities to corporations and then selling the securities to the public Mishkin Ch 3 Terms 1 Commodity Money the money made of precious metals or another valuable commodity 2 Currency paper money and coins 3 Electronic money emoney money in the form of a stored value card smart card or balances to purchase goods and services over the inernet 4 Fiat Money paper currency decreed by the gov39t as legal tender but not convertible into coins or precious metals 5 Hyperin ation periods of extreme in ation 6 Income the ow of earnings over a speci ed period of time 7 Liquidity the relative ease and speed with which an asset can be converted to cash 8 Medium of Exchange anything that can be used to pay for goods and services 9 Monetary aggregates the two measures of the money supply used by the FED M1ampM2 10Payments System the method of conducting transactions in the economy 11Store of Value a repository of purchasing power of time 12Unit of Account anything used to measure value in the economy 13Wealth all resources owned by an individual including all assets Mishkin Ch 4 Terms 1 Cash ows streams of cash payments which can continue inde nitely into the future 2 Consol or perpetuity a bond with no maturity date and no repayment of principle but makes periodic xed coupon payments 3 Coupon bond a credit market instrument that pays the owner a xed interest payment every year until the maturity date when a speci ed nal amount is repaid 4 Coupon rate the dollar amount of the yearly coupon payment expressed as a percentage of the face value of a coupon bond 5 Current yield an approximation of the yield to maturity that equals the yearly coupon payment divided by the price level of the coupon bond 6 Discount bond zerocoupon bond a credit market instrument that is bought at a price below its face value and whose face value is repaid at the maturity date 7 Faceparvalue 8 Fixedpayment loan fully amortized loan a loan in which the borrower makes xes periodic payments for a set period of time 9 Indexed bond a bond where principle and interest payments are adjusted for changes in the price level over time 10lnterestrate risk the possible reduction in returns associated with changes in interest rates 11Nominal interest rate an interest rate that does not take in ation into account 12Present discounted value today39s value of a payment to be received in the future for a given interest rate 13Rate of capital gain the change in a security39s price relative to the initial purchase price 14Real interest rate the interest rate adjusted for expected in ation so that it more accurately re ects the true cost of borrowing 15Real terms re ecting the actual amount of goods and services that can be produced 16Return rate of return the payments to the owner of a security plus the change in the security39s value expressed as a fraction of its purchase price 17Simple Loan a credit market instrument providing the borrower with an amount of funds that must be repaid to the lender at the maturity date along with an additional payment of interest 18Yield to maturity the interest rate that equates the present value of payments received from a credit market instrument with its value today Mishkin Ch 5 Terms 1 Asset market approach an approach used to determine asset prices using stocks 0 assets rather than ows 2 Expected Return the expected return of an asset over the next year 3 Fisher effect the outcome that when expected in ation occurs interest rates will rise 90gt Liquidity the relative ease to and speed with which an asset can be converted into cash Liquidity preference framework Keynes39s theory of the demand for money Opportunity cost the amount of interest or expected return sacri ced by not holding an alternative asset Risk the degree of uncertainty with the return of an asset Theory of portfolio choice the theory that the quantity demanded of an asset is positively related to wealth positively related to the expected return and liquidity of an asset relative to alternatives and negatively related to the risk of the asset compared to alternatives
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