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Definition
| used to describe the activity of providing the funds that finance expenditures on capital |
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Term
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Definition
| what we use to pay for goods and services and factors of production and to make financial transactions -closely intertwined with finance |
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Term
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Definition
the tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services
-ex: ovens for restaurant
-capital: means physical capital |
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Term
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Definition
the funds that firms use to buy physical capital
-ex: bonds and stocks issued |
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Term
| Quantity of capital changes because of |
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Definition
| investment (increases the quantity of capital) and depreciation (decreases it) |
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Term
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Definition
the value of all the things that people own
-what they own is related to what they earn: not the same
-saving: the amount of income that is not paid in taxes or spent on consumption goods and services- savings increases wealth |
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Term
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Definition
-businesses want short term loans: loan from bank
-households want finance to purchase big items: get finance as bank loans
-households get finance to buy new homes: obtained as a loan that is secured by a mortgage |
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Definition
-Large businesses, Governments (federal, state, and municipal): raise finance by issuing bonds
-bonds issued by firms and governments are traded in the bond market |
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Definition
-raises finances for companies
-stock: a certificate of ownership and claim to the firm's profits
stockholder
-ownership based on number of shares owned |
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Term
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Definition
| the total amount spent on new capital |
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Term
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Definition
the change in the value of capital
net investment = (gross investment) - (depreciation) |
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Term
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Definition
the number of dollars that a borrower pays and a lender receives in interest in a year expressed as a percentage of the number of dollars borrowed and lent
-ex: annual interest paid on $500 loan is $25, nominal interest rate is 25 / 500 X 100 = 5% |
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Term
Real interest rate
-real interest paid
-real interest rate forgone |
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Definition
the nominal interest rate adjusted to remove the effects of inflation on the buying power of money
-approximately equal to the nominal interest rate minus the inflation rate
-the opportunity cost of loanable funds: the opportunity cost of borrowing
-real interest paid on borrwed funds is the opportunity cost of borrowing
-real interest rate forgone when funds are used either to buy consumption goods and services or to invest in new capital goods is the opportunity cost of not saving or not lending those funds
-ex: $500 that earns 5% interest- inflation rate 2% per year- you have $525 but it is only worth $510- real interest rate is 3% |
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Term
| Quantity of loanable funds demanded |
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Definition
| the total quantity of funds demanded to finance investment, the government budget deficit, and international investment or lending during a given period |
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Term
| Quantity of loanable funds demanded depends on |
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Definition
-the real interest rate (cost of borrowing)
-expected profit from new capital (benefits from funds borrowed) |
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Term
| Demand for loanable funds |
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Definition
| the relationship between the quantity of loanable funds demanded and the real interest rate when all other influences on borrowing plans remain the same |
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Term
| Main item that makes up the demand for loanable funds |
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Definition
investment: firms will invest capital only if they expect to earn profit, few projects profitable at low interest rates
-"Other things remaining the same, the higher the real interest rate, the smaller is the quantity of loanable funds demanded; and the lower the interest rate, the greater the quantity of loanable funds demanded" |
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Term
| Other things remaining the same, the greater expected profit from new capital |
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Definition
| the greater is the amount of investment and the greater the demand for loanable funds |
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Term
| Quantity of loanable funds supplied |
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Definition
| the total funds available from private saving,the government budget surplus, and international borrowing during a given period |
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Term
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Definition
| the relationship between the quantity of loanable funds supplied and the real interest rate when all other influences stay the same |
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Term
| Factors that change the supply of loanable funds |
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Definition
-the real interest rate
-disposable income
-expected future income
-wealth
-default risk
-anything that increases saving: increases supply of loanable funds |
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Term
| Other things remaining the same, the higher the real interest rate |
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Definition
the greater is the quantity of loanable funds supplied; and the lower the real interest rate, the smaller is the quantity of loanable funds supplied
-higher the interest rate on saving: more likely it is you will want to save |
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Term
The higher the real interest rate
-quantity of loanable funds supplied
-quantity of loanable funds demanded |
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Definition
| the higher the quantity of loanable funds supplied and the smaller is the quantity of loanable funds demanded |
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Term
| Equilibrium real interest rate |
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Definition
-one real interest rate at which the quantities of loanable funds demanded and supplied are equal
-shortage of funds: real interest rate rises
-surplus of funds: real interest rate falls |
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Term
A government surplus:
-loanable funds
-real interest rate
-household saving
-investment |
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Definition
-increases the supply of loans
-real interest rate falls
-household savings decreases
-investment increases |
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Term
Government deficit occurs:
-loanable funds
-real interest rate
-private saving
-investment |
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Definition
-increases the demand of loanable funds
-real interest rate rises
-private saving increases
-investment decreases |
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Term
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Definition
the tendency for a government budget deficit to raise the real interest rate and decrease investment
-crowds out investment by competing with businesses for scarce financial capital |
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