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Chapter 1: Financial and Economic Concepts

Terms

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Any transaction in which money or a money-like instrument is exchanged for other money or another money-like instrument.
Finance
Any organized effort through which buyers and sellers freely exchange goods and services.
Market
Market that deals with finance.
Financial Marketplace
The three primary participants in the financial marketplace.
Individual households, businesses, and the government
The primary savers of funds and the suppliers of funds in our free enterprise financial-market system.
Individual households
The users of funds in the financial-market system.
Businesses and the government
The central theme of economics.
Scarcity
In both business and economics, the four types of scarce resources of typical concern.
Natural, human, capital, and entrepreneurial resources
Consist of products such as minerals, land, and wildlife; sometimes referred to as "land".
Natural Resources
The mental and physical talents of people; sometimes referred to as "labor".
Human Resources
Used to denote the addition of one more unit of measurement; an incremental change.
Marginal
The additional revenue we obtain by selling one more unit of product to create an incremental increase in revenue.
Marginal Revenue Product
The additional product that reults from hiring one more unit of labor.
Marginal Physical Product
The incremental cost of hiring one more unit of labor or the incremental cost of producing one more unit of output.
Marginal Cost
Seperated into two categories that include economic capital and financial capital.
Capital Resources
Those items that people manufacture by combining natural and human resources; sometimes referred to as physical capital or fixed assets.
Economic Capital
May include several types of assets (cash, accounts receivable, stocks, bonds) as it is a dollar-value claim on economic capital.
Financial Capital
The primary payment for economic and financial capital.
Interest
Individuals who assume risk and begin business enterprises.
Entrepreneurial Resources
The economic paid to the entrepreneur.
Profit
When a decision to invest funds is made, the highest value surrendered is... (a quantifiable term).
Opportunity Cost
All the money received from all sources during a year, including wages, tips, interest, bonds, rental income, and profits andis subject to taxation by the government.
Gross Income
Payments to the government for goods and services provided by the government.
Taxes
A larger percentage of income is taken as that income increases.
Progressive Taxation
A higher percentage of income is taken as that income decreases.
Regressive Taxation
The percentage of income taken is the same regardless of income.
Proportional Taxation
Up to a certain limit, there is no tax paid until that limit is reached, at which point a flat rate is applied to all income above the stated limit; is actually a progressive tax proposal.
Flat-Tax Proposal
The left over income after taxation.
Disposable Income
The income left over after fixed expenses such as rent, utilities, and insurance have been paid.
Discretionary Income
Use of Discretionary Income (as opposed to saving).
Consumption; or spending
A principal amount of money that is exchanged for a promise to repay the amount, plus interest.
Loan
Determines the amount of interest paid on the principal amount of a loan.
Interest Rate (in effect at the time of the loan)
The five primary factors that affect interest rates...
Supply of money saved, demand for borrowed money, Federal Reserve Policy, inflation, and risk.
The total money that is placed in demand deposit (checking) accounts, savings accounts, and money market mutual funds.
Supply of money saved
States that as the payment for, or the price, of an item increases the quantity of the item supplied to the market will increase.
Law of Supply
Generated by determining how much of a product or service people or businesses would be willing and able to provide to the market at various prices.
Supply Table
Created from the data of a supply table by horizontally summing the total money saved at varying interest rates.
Supply Curve
Four measures of the money supply in the United Staes.
M1, M2, M3, and L
Consists mostly of money in circulation and money in checking accounts (demand deposits)
M1
Includes M1 plus money in passbook savings accounts, retail money market accounts, and small time deposits.
M2
All the money that is demanded in our economy at a given price.
Demand for borrowed funds
States that as the price of an item decreases, people will demand a larger quantity of that item.
Law of Demand
Generated by determining how much individuals are willing to borrow at varying interest rates.
Demand Table
The horizontal summation of a demand table.
Demand Curve
The interest rate at which the supply and demand cruves intersect.
Equilibrium Point
The central bank of the United States, responsible for controlling the monetary policy of the U.S.
Federal Reserve (Fed)
Governmental action to change the supply of money to expand or contract economic activity.
Monetary policy
The three basic goals of the Federal Reserve.
Economic growth, price stability, and full employment
When the average price of goods increases.
Inflation
Represents a market basket of goods that the average American consumer purchases each month; most often used measure of inflation.
Consumer Price Index (CPI)
The three primary tools the Federal Reserve uses to control the money supply:
Open Market Operations, Bank Reserve Requirements, and the Discount Rate
Consist of the Fed purchasing or selling U.S. securities; the most significant tool of the Fed, is in constant use.
Open Market Operations
Established percentage of deposits placed in banks that must be maintained to conduct daily operations and that cannot be used for lending purposes; seldom used.
Reserve Requirement
The rate of interest that the Fed charges banks to borrow money from the Fed.
Discount Rate
The banking industry considers the Fed...
The Lender of Last Resort
The probability that the actual return on an incestment will be different from the desired return; an individual's tolerance for investments.
Risk
Associated with economic, political, and sociological changes that affect all participants on an equal basis.
Systematic Risk
Unique to an individual, firm, or industry.
Unsystematic Risk
That rate charged by banks to their best customers.
Prime Lending Rate

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