Money and Banking 4
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Created by:
tofugirlx3 on February 26, 2012
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Determining Interest Rates
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10 terms
Terms | Definitions |
|---|---|
 Expected return | The return on an asset during a future period; also known as expected rate of return |
| Risk | The degree of uncertainty in the return on an asset |
| Diversification | Dividing wealth among many different assets to reduce risk |
| Market (or systematic) risk | Risk that is common to all assets of a certain type, such as the increases and decreases in stocks resulting from the business cycle |
| Idiosyncratic (or unsystematic) risk | Risk that pertains to a particular asset rather than to the market as a whole, tas when the price of a particular firm's stock fluctuates because of the success or failure of a new product |
| Fisher effect | The assertation by Irving Fisher that the nominal interest rises or falls point-for-point with changes in the expected inflation rate |
| Closed economy | An economy in which households, firms, and governments do not borrow or lend internationally |
| Open economy | An economy in which households, firms, and governments borrow and lend internationally |
| Small open economy | An economy in which total saving is too small to affect the world real interest rate |
| Large open economy | An economy in which shifts in domestic saving and investment are large enough to affect the world real interest rate |
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