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