Crowding out causes the supply of loanable funds to

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Crowding Out – causes the supply of loanable funds to decrease and interest rates to increase Crowding out occurs when the government borrows money to offset its budget deficit, causing a decrease in the amount of loanable money held by banks Money – any asset that can be used to make a purchase, generally in the form of currency and coin Barter – the direct trading of one good or service for another Medium of exchange – something that is used to purchase something else Flat Money – money that has not intrinsic value Backed and regulated by a nation or government body Most important aspect of flat currency is the regulation board, without regulation board, flat money is worthless Reserve Requirement or Ratio – is the percentage of all deposited funds that the Fed (under Regulation D) requires that all banks and depository institutions hold These monies allow banks to satisfy customer payments and withdrawals Bank reserves are not counted as part of the banks money supply Bonds Principal Bond Amount – the initial amount of a bond Maturation Date – the date of repayment Coupon payment – yearly interest payments made on bonds o Can be figured out by multiplying the principal amount by the coupon rate Coupon Rate – bonds interest rate o Found by dividing the annual coupon payment by the principal amount Stock – a claim to partial ownership in a company Dividends – regular payments stockholders receive based on the amount of shares they own Stockholders also receive capital gains when the stock prices increase Risk Premium – the rate required to hold risky assets minus the rate of safe assets Investors require higher rates of return when the investment risk is higher Diversification – spreading wealth among many varieties and types of investments in order to reduce risk Mutual Funds – sell shares to the public and then use the funds received from investors to buy a variety of assets Mutual funds are normally well diversified with stocks, bonds from multiple sectors Portfolio Allocation – decisions that determine how wealth will be held Choice to diversify is one example of portfolio allocation Liquidity Preference – individual’s preference to hold their wealth primarily in the form of money
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Opportunity Cost – the amount of other products that must be foregone or sacrificed to obtain some amount of any given product. Example: If we suppose we have a $ 10 budget for a party for balloons and streamers. Streamers are $1 each and Balloons are $2 each, if you buy 10 streamers, you do not have any money left for balloons, if you buy 8 streamers you can buy 1 balloon, if you buy 6 streamers you can buy 2 balloons, etc. o The opportunity cost of buying 1 balloon is 2 streamers, or 1 streamer = ½ balloon Production Possibilities Curve – (PPC) – a graph that depicts the boundary between those production levels that can be attained and those that cannot (A-E points on the graph- slope from top left to bottom right) attainable
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