Key Terms Exam 1 Ch 1 4 22 Ch 1 1 Aggregate income the total income of factors of production land labor capitol in the economy 2 Aggregate output the total production of all goods and services in the economy 3 Aggregate price level the average price of goods and services in the economy 4 Asset a financial claim or piece of property that is a store of value 5 Banks financial institutions that accept money deposits and make loans 6 Bonds a debt security that promises to make payments periodically for a specified period of time 7 Budget deficit the excess of the government expenditure over tax revenues 8 Budget surplus the excess of tax revenues over government expenditures 9 Central bank the government agency that oversees the banking system and is responsible for the amount of money and credit supplied in the economy 10 Common stock a security that is a claim on the earnings and the asserts of a company 11 E finance a new means of delivering financial services electronically 12 The fed Central banking authority of the United States 13 Financial crises a major disruption in the financial markets that is characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms 14 Financial intermediaries institutions that borrow funds from people who have funds 15 Financial markets markets in which funds are transferred from people with surplus to saved and uses them as loans people in need of money 16 Fiscal policy policy that involves decisions about government spending and taxation 17 Foreign exchange market market in which exchange rates are determined 18 Foreign exchange rate price of one currency in another country 19 GDP the value of all final goods and services produced in the economy during the 20 Inflation the condition of a continually rising price level 21 Inflation rate the rate of change of the price level usually measured as a percentage 22 Interest rate the cost of borrowing orr the price paid for the rental of funds 23 Monetary policy management of money supply and interest rates 24 Monetary theory theory that relates changes in the quantity of money to to changes in course of a year change per year the economy 25 Money money supply anything that is generally accepted in payment of goods or services or in the repayment of debits 26 Recession a period where the aggregate output is declining 27 Security a clam on the borrower s future income that is sold by the borrower to the lender 28 Stock a security that is a claim on the earnings and assets if a company 29 Unemployment rate the percentage of the labor force not working Ch2 1 Adverse selection problem caused by asymmetrical info the before The people who are most undesirable are people who want to engage in risky activity 2 Asset transformation process of turning risky assets into less risky assets Create sell assets with low risk to gather income to purchase assets with higher risk 3 Asymmetric information the unknown knowledge that each person has during a transaction about the other person 4 Brokers agents for investors match buyers and sellers 5 Capital wealth either financial or physical that is employed to produce more wealth 6 Capital market a financial market in which longer term debt and equity instruments are 7 Currency paper money and coins 8 Dealers people who link buyers with sellers by buying and selling securities at stated prices 9 Default a situation where someone who has a debit security cannot pay when the traded instrument matures 10 Diversification a collection of assets that do not move together reduces risk portfolio 11 Dividends periodic payments made by equities to shareholders 12 Economies of scale the reduction in transaction costs per dollar of transaction as the size of 13 Equities claims to share in the net income and assets of a corporation common stock 14 Eurobond bonds denominated in a currency other than that of the country in which they are 15 Eurocurrencies a variant of the Eurobond foreign currencies deposited in banks outside the 16 Eurodollars us dollars that are deposited in foreign banks outside the US or in foreign 17 Exchanges secondary markets in which buyers and sellers of securities meet in one central 18 Federal funds rate the interest rate on overnight loans of deposits at the FED 19 Financial intermediation institutions that borrow funds from people who have saved and 20 Financial panic the widespread collapse of financial markets and intermediaries in an 21 Foreign bonds bonds sold in a foreign country and denominated in that country s currency transactions increases sold home country branches of US banks location to conduct trades then make loans to others economy 22 Intermediate term with the reference to a debt instrument having a maturity between one and ten years 23 Investment bank firms that assist in the initial sale of securities in the primary market 24 Liabilities debt 25 Liquid easily converted to money 26 Liquidity services services financial intermediaries provide to their customers to make it easier for them to conduct their transactions 27 Long term having a maturity of 10 or more years 28 Maturity time to the expiration date of a debt instrument 29 Money market a financial market in which only short term debt instruments are traded 30 Moral hazard the risk that one party to a transaction will engage in behavior that is undesirable from the other party s point of view 31 OTC 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 price 32 Portfolio a collection of a group of assets 33 Primary market a financial market in which new issues if a security are sold to initial buyers 34 Risk the degree of uncertainty associated with the return on an asset 35 Risk sharing the process of creating and selling assets with risk characteristics that people are comfortable with and then using the funds acquired by selling those assets to purchase other assets that may have far more risk 36 Secondary marker a financial market in which securities that people have previously been 37 Short term with reference to debt instruments having a maturity of one year or less 38 Thrift institutions savings and loan associations mutual savings banks and credit unions 39 Transaction costs the time and money spent trying to exchange financial assets goods or issued can be resold services 40 Underwrite purchase