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represents ownership in a firm and is, therefore, a claim to the profits that the firm makes.
an institution that sells shares to the public and uses the proceeds to buy a selection, or portfolio, of various types of stocks, bonds, or both stocks and bonds. If the values of the portfolio rises, the shareholder benefits; if the value of the portfolio falls, the shareholder suffers the loss.
if T exceeds G, the government runs a budget surplus because it receives more money than it spends. An excess of tax revenue over government spending.
If the government spends more than it receives in tax revenue, then G is larger than T. A shortfall of tax revenue from government spending.
the total income in the economy that remains after paying for consumption and government purchases.
Market for loanable funds
all savers go to this market to deposit their saving, and all borrowers go to this market to take out their loans. Loanable funds refers to all income that people have chosen to save and lend out, rather than use for their own consumption, and to the amount that investors have chosen to borrow to fund new investment projects. In the market for loanable funds, there is one interest rate, which is both the return to saving and the cost of borrowing.
The supply of loanable funds
comes from people who have some extra income they wants to save and lend out. This lending can occur directly, such as when a household buys a bond from a firm, or it can occur indirectly, such as when a household makes a deposit in a bank. Saving is the sources of the supply of loanable funds.
The demand for loanable funds
comes from households and firms who wish to borrow to make investments. This demand includes families taking out mortgages to buy new homes. It also includes firms borrowing to buy new equipment or build factories. Investment is the source of the demand for loanable funds.
Investment tax credit
a decrease in investment that results from government borrowing.
If r is the interest rate then an amount X to be received in N years has a present value of X/(1+r)^N (known as discounting)
if we are investing at an interest rate of 5% for 10 years, then the future value of the $100 will be (1.05)^10 x $100 which is $163
Efficient markets hypothesis
the theory that asset prices reflect all publicly available information about the value of an asset. Equilibrium of supply and demand sets the market price.
the description of asset prices that rationally reflect all available information. Good news about a company's prospects become public: value and stock rise. Bad news: value and stock fall.
means that the changes in stock prices are impossible to predict from available information.
whenever the price of an asset rises above what appears to be its fundamental value.
this category includes those who were not employed, were available for work, and had tried to find employment during the previous 4 weeks. It also includes those waiting to be recalled to a job from which they had been laid off.
Not in labor force
this category includes those who fit neither of the first two categories, such as a full-time student, homemaker, or retiree.
the process by which unions and firms agree on the terms of employment.
the study of how households and firms make decisions and how they interact in markets
spending by households on goods and services, with the exception of purchases of new housing
spending on capital equipment, inventories, and structures, including household purchases of new housing
a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond. It identifies the time at which the loan will be repaid, called the date of maturity, and the rate of interest that will be paid periodically until the loan matures.
the accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future. Ex: after N years... (1+r)^N x P.
the uncertainty associated with the specific companies.
the uncertainty associated with the entire economy, which affects all companies traded on the stock market.
includes those who worked as paid employees, worked in their own business, or worked as unpaid workers in a family member’s business. Both full-time and part-time workers are counted.
This category also includes those who were not working but who had jobs from which they were temporarily absent because of, for example, vacation, illness, or bad weather.
individuals who would like to work but have given up looking for a job.
not counted in labor force.
one that does not interact with other economies. In particular, a closed economy does not engage in international trade in goods and services, nor does it engage in international borrowing and lending. (imports and exports are exactly zero)
Actual economies are open economies- they interact with other economies around the world
spending on goods and services by local, state and federal governments
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
forgoing buying a good today
buying a good tomorrow when paid back
the gross real return
π = inflation
maturity is less than one year and is when the government pays you back
financial institutions through which savers can indirectly provide funds to borrowers.
Ex: banks and mutual funds
take in deposits from people who want to save and use these deposits to make loans to people who want to borrow.
the interest rate is the price of a loan. It represent the amount that borrowers pay for loans and the amount that lenders receive on their saving.
high interest rate for loans
makes borrowing more expensive, the quantity of loanable funds demanded falls as the interest rate rises. Similarly, because a high interest rate makes saving more attractive, the quantity of loanable funds supplied rises as the interest rate rises.
Loanable funds has to do with what interest rate
The money today is more valuable than the same amount of money in the future.
a dislike of uncertainty. People dislike bad things more than they like comparable good things. Ex: the pain of losing $1000 would exceed the pleasure from winning $1000
as wealth rises, the utility function becomes flatter aka diminishing marginal utility, a $1000 loss decrease utility by more than a $1000 gain increases it.
reduces risk. The general feature of insurance contracts is that a person facing a risk pays a fee to an insurance company, which in return agrees to accept all or part of the risk.
Two problems for the markets for insurance:
1) adverse selection: a high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection.
2) moral hazard: after people buy insurance, they have less incentive to be careful about their risky behavior because the insurance company will cover much of the resulting losses.
the risk of a portfolio of stocks
depends on the number of stocks in the portfolio. Risk is measured with standard deviation. The higher the standard deviation of a portfolio's return, the more volatile its return is likely to be, and the riskier it is that someone holding the portfolio will fail to get the return that he or she expected.
The trade-off between risk and return
the more a person puts into stocks, the great is both the risk and the return. Stocks are more risky but they have a higher return rate. The safe alternative can be either a bank savings account or a government bond but with a lower return rate.
When deciding to buy stock
you are buying shares in a business and you want to consider two things: the value of that share of the business and the price at which the shares are being sold. If the price is less than the value, the stock is said to be undervalued. If the price is more than the value, the stock is said to be overvalued. If the price and the value are equal the stock is said to be fairly valued.
cash payments that a company makes to its shareholders.
a mutual fund that buys all the stocks in a given stock index.
How is unemployment measured
The Bureau of Labor Statistics surveys 60,000 households every month and it places each adult (age 16 or above) into one of three categories:
employed, unemployed, or not in labor force
workers may take a few weeks between jobs to find the openings that best suit their preferences and skills. It is not a big problem
it is a serious problem, since workers unemployed for many months are more likely to suffer economic and psychological hardship
changes in the composition of demand among industries or regions.
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