Financial Markets – markets in which funds are transferred from people who have an excess of available funds to people who have a shortage
- ex. Bond and stock markets; these are crucial to promoting greater economic efficiency
Security (financial instrument) – claim on the issuer’s future income or assets
Bond – debt security that promises to make payments periodically for a specified period of time
Interest Rate – cost of borrowing or the price paid for the rental of funds
- ex. Mortgage rates, car loan rates, interest on bonds
The interest rate on 3 month T-bills fluctuate more than other interest rates and is lower on average.
The interest rate on Long Term corporate bonds is higher on average than the other interest rates, and the spread between it and the other rates fluctuates over time.
Common Stock – represents a share of ownership in a corporate; a security that is a claim on the earnings and assets of the corporation
The financial system is complex, comprising many types of private sector financial institutions, including banks, insurance companies, mutual funds, finance companies, and investment banks, all of which are heavily regulated by the government.
Financial Intermediaries – institutions that borrow funds from people who have saved and in turn make loans to others
Financial Crises – major disruptions in financial markets that are characterized by sharp declines in asset prices and failures of many financial and nonfinancial firms
Aggregate Output – total production of goods and services
Monetary Theory – relates changes in the quantity of money to changes in aggregate economic activity and the price level
Aggregate Price Level – the average price of goods and services in an economy
Inflation – a continual increase in the price level
The price level and the money supply generally move closely together. This