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10 terms

Money and Banking 4

Determining Interest Rates
STUDY
PLAY
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