Format Ch 1 and 2 8 question Ch 3 3 questions Ch 4 5 12 questions Risk 2 questions Bond Sup and Demand 5 questions Ch 6 7 questions ECON 330 Study Guide Test 1 Ch 1 Key Terms Aggregate income Aggregate output total production of goods and services Aggregate price level average price of goods and services in an economy Asset any financial claim or piece of property that is subject to ownership Banks financial institutions that accept deposits and make loans Bond debt security that promises to make payments periodically for a specified period of time Business cycles the upward and downward movement of aggregate output in an economy E finance ability to deliver financial services electronically Financial crises major disruptions in financial markets characterized by sharp declines in asset prices and the failures of many firms Financial innovation the development of new financial products and services more efficient Financial intermediaries institutions that borrow funds from people who have saved and in turn make loans to others Financial market markets in which funds are transferred from people who have an excess of funds to people who have a shortage Fiscal policy decisions about government spending and taxation Foreign exchange market where currency from country to country is exchanged Foreign exchange rate price of one countries currency to another GDP measure of aggregate output Inflation continual increase in price level Inflation rate rate of change in price level over a year Interest rate cost of borrowing or price paid for the rental of funds Monetary policy management of money and Interest rates Monetary theory theory that relates the quantity of money to monetary policy to changes in aggregate economic activity and inflation Money supply anything accepted in payment for goods or services or repayments of debts Recession periods of declining aggregate output Security claim on the issuer s future income or assets Stock a share of ownership in a corporation Unemployment rate percentage of available labor force unemployed Notes The Bond Market and Interest Rates o Enables corporations and government to borrow finance activities o High Interest rates impact overall health of an economy Affect customers willingness to spend and save Tend to move in unison long and short Stock Market o Affect size of peoples wealth and willingness to spend o Important for business because its their ability to raise money Financial Institutions and Banks make financial markets work o Structure financial intermediaries o Financial crises major disruptions in financial markets characterized by sharp declines in asset prices and the failures of many firms Money and Monetary Policy o Money plays an important role in generating business cycles o Inflation is very important for governments Money supply factors into inflation more printed money more inflation o Monetary Policy controlled by FED and affects money and IR o Fiscal Policy Controlled by government spending and taxing International Finance o Exchange rate factors into Exports Imports Ch 2 Key Terms Adverse selection the problem created by asymmetric information before the transaction occurs Asset transformation risky assets are turned into safer assets for investors Asymmetric information one party does not know enough about the other party Brokers agents of investors who match buyers with sellers of securities Capital wealth that is employed to produce more wealth Capital market market in which longer term debt and equity instruments are traded Currency paper money or coins Dealers link buyers and sellers by buying and selling securities at stated prices Default when the party issuing the debt instrument is unable to make interest payments Diversification reducing risk strategy Dividends periodic payments to shareholders of equity Economies of scale the reduction in transaction costs per dollar of transactions as the size of transactions increases Economies of scope can lower the cost of information production for each service by applying one information resource to many different services Equities claims to share in the net income and assets of a business way to raise funds Eurobond bond dominated in a currency other than that of the country in which it is sold Eurocurrencies foreign currencies deposited in banks outside the home country Eurodollars U S dollars deposited in foreign banks outside the United States or in foreign branches of U S banks Exchanges where buyers and sellers of securities meet to conduct trades Federal fund rate interest rate on the credit needs of banks closely watched Financial intermediation primary route for moving funds from lenders to borrowers indirect finance Financial panic asymmetric information leading to widespread collapse of financial intermediaries Foreign bonds traditional instruments in the international bond market Intermediate term maturities between 1 and 10 years Investment bank assist in the initial sale of securites underwriting Liquid ease at wish an asset can be converted to its full value in cash Long term maturities longer than 10 years Maturity number of years until that instruments expiration date Money market financial market in which only short term debt instruments are traded Moral hazard problem created by asymmetric information after the transactions occurs Mortgages loans to purchase land etc where the land itself serves as collateral Mortgage backed securities a bond like debt instrument backed by a bundle of individual mortgages Over the counter market another secondary market that have inventories of securities to be sold at a set price Portfolio Primary market financial market in which new issues of a security are sold to initial buyers by the corporation or government agency borrowing the funds Risk uncertainty about returns investors will earn on assets Risk sharing financial intermediaries do this Secondary market financial market in which securities that have been previously issued can be resold Short term maturity less than one year Thrift institutions savings and loan associations mutual savings banks and credit unions Transaction costs time and money spent in carrying out financial transactions Underwriting guarantees a price and then sells them to the public Notes Function of Financial Markets o Essential because allow funds to be lent and borrowed grow economy PROMOTE ECONOMIC EFFICIENCY o Direct Finance borrowers borrow funds directly from lenders in financial