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chapter 10
| Question | Answer |
|---|---|
| Debtors and borrowers | economic agents, like entrepreneurs, businesses, home buyers, and college students, who borrow funds |
| credit | the amount of loans that the debtor receives |
| interest rate | the additional payment, above and beyond the principal (the loan amount), that a borrower makes on a $1 loan |
| nominal interest rate, i | the annual cost of a $1 loan |
| real interest rate, r | the annual real or inflation adjusted cost of a $1 loan. It accounts for the decline in the value of 1 dollar because of the increasse in the overall price level |
| quantity of credit demanded | the amount of loans that borrowers are willing to borrow at a given real interest rate |
| credit demand schedule | a table that reports the quantity of credit demanded at different real interest rates, holding all else equal |
| credit demand curve | a curve that plots the quantity of credit demanded at different real interest rates |
| steepness of credit demand curve | tells us the sensitivity of the relationship between real interest rate and quantity of credit demanded |
| credit demand curve shifts | when changes to perceived business opportunities for firms, household preferences of expectations, government policy |
| quantity of credit supplied | the amount of funds that people and firms save at a given interest rate |
| credit supply schedule | a table that reports the quantity of credit supplied at different real interest rates, holding all else equal |
| credit supply curve | a curve that plots the quantity of credit supplied at different real interest rates |
| credit supply curve shifts when changes to | saving motives of households because of expectations about the future or demographic changes saving motives of firms, RETAINED EARNINGS |
| total quantity of credit in the market (Q*) | quantity value where credit demand curve and credit supply curve intersect |
| equilibrium real interest rate (r*) | real interest rate where credit demand curve and credit supply curve intersect |
| balance sheet | records the assets and liabilities of a company, like a bank |
| asset | something owned by a bank. if an asset is sold, the payment goes to the bank |
| liability | something owed to another institution. If it is sold, the payment comes from the bank |
| bank reserves | vault cash and holdings on deposit at the federal reserve bank |
| cash equivalents | riskless, liquid assets that a bank can immediately access (deposits at other banks), |
| long term investments | loans to households and firms and the value of the banks properties |
| bank assets | bank reserves, cash equivalents, long term investments |
| bank liabilities | demand deposits, short term borrowing, long term debt, stockholder's equity |
| demand deposits | funds that depositors can access on demand using withdrawals, checks, or debit cards |
| short term borrowing | consists of loans from other financial institutions that are short in duration |
| long term debt | debt that is due to be repaid in one year or more |
| stockholder's equity | the difference between a bank's total assets and total liabilities. Equal to the estimated value of a company if priced correctly by the stock market. Total assets = total liabilities+ stockholder's equity |
| bank 3 interrelated functions | identify profitable lending opportunities, transform short term liabilities into long term investments (maturity transformation), manage risk through diversification |
| maturity transformation | when banks transform short maturity liabilities, like deposits, into long term investments, like business and real estate loans |
| maturity | the time until a debt must be repaid |
| solvent | when a banks assets are larger than their liabilities |
| insolvent | when a bank has more liabilities than assets |
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