ECON 330 Test 1 Study Guide Chapter 1 o Financial Markets Markets in which funds are transferred from people who have an excess of available funds to people who have a shortage o Security Is a claim on the issuer s future income or assets o Assets Any financial claim or piece of property that is subject to ownership o Bond Is a debt security that promises to make payments periodically for a specified period of time o Interest Rate The cost of borrowing or the price paid for the rental funds o Common Stock Represents a share of ownership in a corporation o Financial Intermediaries Institutions that borrow funds from people who have saved and in turn make loans to others o Financial Crises Major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms o Banks Financial institutions that accept deposits and make loans o Money Money Supply Is defined as anything that is generally accepted in payment for goods or services or in the repayment of debts o Aggregate Output Total production of goods and services o Unemployment Rate Percentage of the available labor force unemployed o Business Cycle The upward and downward movement of aggregate output produced in the economy o Recession Periods of declining aggregate output o The rate of money growth has declined before every recession indicating that changes in the money might be a driving force behind business cycle fluctuations o Monetary Theory The theory that relates changes in the quantity of money to changes in aggregate economic activity and the price level o Aggregate Price Level The average price of goods and services in an economy o Inflation A continual increase in the price level affects individuals businesses and the government o Inflation Rate The rate of change the price level usually measured as a percentage change per year o Monetary Policy The management of money and interest rates o Central Bank The organization responsible for the conduct of a nation s monetary policy o Federal Reserve System The United States central bank o Fiscal Policy involves decisions about government spending and taxation o Budget Deficit Is the excess of government expenditures over tax revenues for a particular time period o Budget Surplus Arises when tax revenues exceed government expenditures o Gross Domestic Product GDP The market value of all final goods and services produced in a country during that year o Foreign Exchange Market Where currencies are traded and the transfer of funds from one country to another o Foreign Exchange Rate The price of one country s currency in terms of another s Chapter 2 o Capital Wealth either financial or physical that is employed to produce more wealth which contributes to higher production and efficiency for the overall economy o Debt Instrument A bond or a mortgage which is a contractual agreement by the borrower to pay the holder of the instrument fixed dollar amount at regular intervals until a specified date o Maturity Number of years until that instrument s expiration date o Short Term Maturity Less than one year o Long Term Maturity Ten years or longer o Intermediate Term Maturity Between one and ten years o Equities Common Stock Claims to share in the net income and the assets of a business o Disadvantage of owning a company s equity rather than its debt is that a corporation must pay all of its debt holders before its equity holders o Size of the debt market is substantially larger than the size of the equities market o Dividends Periodic payments made to stockholders o Primary Market Financial market in which new issues of a security such as a bond or stock are sold to initial buyers by the corporation or government agency borrowing the funds o Secondary Market Financial market in which securities that have been previously issued can be resold o Investment Bank An important financial institution that assists in the initial sale of securities in the primary market o Underwriting Securities Guarantees a price for a corporation s securities and then sells them to the public o Brokers Agents of investors who match buyers with sellers of securities o Dealers Link buyers and seller by buying securities at stated prices o Exchanges Where buyers and sellers of securities or their agents or brokers meet in one central location to conduct trades o Default A situation in which the party issuing the debt instrument is unable to make interest payments or pay off the amount owed when the instrument matures o Money Market A financial market in which only short term debt instruments generally those with a maturity of less than one year are traded o Capital Market Market in which longer term debt generally those with original maturity of one year or greater and equities instruments are traded o The federal government is always able to meet its debt obligations because it can raise taxes or issue currency to pay off its debts o Currency Paper money or coins o Federal Funds Rate Interest rate on federal funds closely watched barometer of the tightness of the credit market conditions in the banking system and the stance of monetary policy When it is high banks are strapped for funds when it is low banks credit needs are low o Money Market Instruments o United States Treasury Bills Short term debt instrument issued by the US government Most liquid of all the money market instruments because they are the most actively traded Also the safest because there is almost no possibility of default Held mainly by banks o Negotiable Bank Certificate of Deposit Debt instrument sold by a bank to depositors Extremely important source of funds for commercial banks o Commercial Paper Short term debt instrument issued by large banks and well known corporations o Repurchase Agreement Effectively are short term loans usually with a maturity of less than two weeks for which Treasury Bills serve as collateral Essentially a large corporation uses excess funds to buy treasury bills from a bank which agrees to repurchase them the next week at a slightly higher price than the original purchase price o Federal Funds Typically are overnight loans between banks of their deposits at the Federal Reserve A bank will borrow these funds to meet the amount of deposits required by regulators o Stocks Equity claims on the net income and assets of a corporation o Mortgages Loans to households or firms to purchase housing land or other real structures where the