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Financial Management Chpt 2
Terms in this set (81)
What lead to the financial crisis of 2007-2008?
Housing prices declined which caused a credit crunch, which then contributed to high employment ultimately decreasing economic activity. It was the "perfect financial storm"
Massive amounts of debt were taken on by individuals, business firms, financial institutions and government entities after government entities attempted to survive the financial crisis by increasing their deficits (through increased expenditures in the form of stimulus programs) which ultimately increased the size of debt.
How do surplus economic units and deficit economic units differ?
A surplus economic unit is an institution that makes more money than it spends. The extra money is a profit to either save or invest. Deficit economic units differ by spending more money than they make. They function by balancing money receipts with money expenditures and by obtaining extra money from additional units.
Describe the three basic ways where money is transferred between savers and business firms
1. Direct Transfer- where savers directly purchase securities (stocks or debt interments) of a business firm by exchanging money for the firm's securities.
2. Indirect Transfer (through an investment banking firm)
- More common. Money is transferred from savers to investors. Savers provide money to purchase business firms securities. financial institutions operate to bring savers and security issuers together and facilitate the savings-investment process by purchasing the securities being issued by a company and then reselling the securities to the savers.
3. Indirect Transfer (through a financial intermediary)- savers deposit or invest money with a financial institution (bank, insurance company, mutual fund) which issues its own securities to the saver. EXAMPLE:
Saver gives money in form of currency in exchange for the banks savings or time deposit obligation.
Bank lends money to a business firm in exchange for that firms "i owe you" AKA a loan.
This process creates a debt security/debt instrument by both the financial institution and the business firm.
Identify economic units in addition to business firms who might need funds from savers
Surplus economic unit- Generates more money than it spends, therefore creating excess money to save or invest with
Deficit economic unit- Spends more money than it brings in and must balance its money receipts with money expenditures by obtaining money from surplus units
Savings-investment process- Involves the direct or indirect transfer of individual savings to business firms in exchange for their debt or stock securities
Identify the major participants in the U.S monetary system
1. Central bank- Defines and regulates the amount of money supply in the financial system. Also facilitates the transferring of money by processing and clearing checks (deposit money)
2. Banking System- creates money, transfers money, provides financial intermediation, processes/clears checks
3. Individual Banks- Cannot create their own money but instead uses "reserves" to represent the money individual banks receive.
*Reserves- Money held by the bank so that it can pay off checks deposited into client accounts against their own checking account balance.
Reserves are usually held in fractions and the rest is lent out by the bank to other client accounts as long as the other clients place loan proceeds in another checking account in another bank
Indicate how real assets and financial assets differ
Real assets are the direct ownership of a concrete purchases such as land, buildings, homes, equipment or goods. Financial assets are financial contracts such as debt instruments and equity securities which are represented by real assets.
Define money and indicate the basic functions of money
Money is anything generally accepted as a means of paying for goods, services, or relieving debts. money performs three basic functions: serving as a medium of exchange, a store of value, and a standard of value.
Describe how an individuals net worth is determined
Net worth is the sum of an individual's money combined with their physical real assets and their financial assets, than combined with any loss such as debt obligations.
Briefly describe the development of money, from barter to the use of precious metals
The development of money started with bartering, or the system of using a fair amount of goods to trade for someone else's goods. People started doing this with herding sheep, raising grain, or shaping metals and then trading the goods they produced. The system was flawed, however, for people who wanted to trade higher valued items for lower valued items. For example, trading a cow was problematic if you were looking for grain in return because the trader would need a surplus of grain to fairly trade for the cow. For these reasons, the development of money came about which represented valued metals.
What is the difference between full-bodied money and token coins?
Full-body money are coins that have an equal value in metal with their face value. Token coins however have a higher face value than the value of the metal that they are consisted of.
Describe how representative full-bodied money and fiat money differ
Representative full - bodied money is paper money that is backed by metal equal to the value to the face amount. Flat money is not backed by gold or silver.
What is deposit money and how is it "backed"
Deposit money is money that is credited and is backed up by credit worthless of the depository institution that issued the the deposit.
What are automatic transfer service accounts? (ATS)
The purpose of an automatic transfer service account (ATS) is to make direct deposits, to make payments, and to make checkable deposit accounts available.
What are debit cards, and how are they used?
Debit cards provide immediate transfer of deposit amounts. They are used to purchase merchandise at any store or online sales. The cardholder transfers amount from purchaser's account to retailers account. They are also used to make cash withdrawals from an ATM.
Define money market securities and briefly describe the major types of these securities
Money market securities are debt instruments or securities with maturities of one year or less. These typically have expectations of debt being repaid by the due date with low risk and high liquidity. Example of major market securities are treasury bills, commercial paper, negotiable certificates of deposit, banker's acceptances, repurchase agreements, and federal funds.
Describe the M1 definition of the money supply and indicate the relative significance of the M1 components
M1 money supply is also known as currency, travelers' checks, demand deposits, and other checkable deposits at a place that accepts valid checks. M2 money supply is M1 plus highly liquid financial assets. This includes saving accounts, small time deposits, and retail money market mutual funds (MMMFs). An MMMF issues shares to customers and invests the proceeds in highly liquid, short maturity, interest-bearing debt accounts. These deposits are called money market investments.
How does M2 differ from M1? What are money market mutual funds?
M2 differs from M1 because M2 provides their owners with a higher rate of return than M1 components. Money market mutual funds shares to customers and invest proceeds in highly, liquid short maturity, interest bearing debt instruments. That is called money market instruments.
Briefly describe the monetarists' view of the relationship between money supply and economic activity
Montetarist's believe that when the money supply increases and exceeds the money that is demanded that the economy will be spending more money causing prices to rise.
How do Keynesians view the relationship between money supply and economic activity?
Keynesians believe that the best way to increase the money supply and economic activity is to reduce interest rates. The idea is that when interest rates fall more money is being supplied than is demanded which will lead to more consumption and investment spending.
Describe the development of the international monetary system
International monetary system is also with the gold standard and it was and it was used to conduct most international trade during latter part. The gold standard had a breakdown which led to less formal exchange systems.
Surplus economic unit
Generates more money than it spends and thus it has excess money to save or invest
Deficit Economic Unit
Spends more money than it brings in and must balance its money receipts with money expenditures by obtaining money from surplus units
Savings investment process
Involves the direct or indirect transfer of individual savings to business firms in exchange for their debt or stock securities
Include the direct ownership of land, buildings/home, equipment, inventories, durable goods and precious metals
Money, debt interments, equity securities, and other financial contracts that are backed by real assets and the earning abilities of issuers
anything generally accepted as a means of paying for goods, services, and paying off debt
Medium of Exchange
The basic function of money
Exchange of goods and services without using money
Store of Value
Money held for some period of time before it is spent
The ease with which an asset can be exchange for money or other assets
Standard of Value
Prices and contracts for deferred payments are expressed in terms of the monetary unit
Individual Net Worth
Sum of an individuals money, real assets and financial assets or claimed against others less the individuals debt obligations
Monetary standard based on two metals, usually silver or gold
Full bodied Money
coins that contain the same value in metal as their face value
Coins with face values higher than the value of their metal content
Representative Full Bodied Money
Paper money that is backed by an amount of precious metal equal in value to the face amount of the paper money
Legal tender proclaimed to be money by law
Money backed by the creditworthiness of the issuer
Automatic Transfer Service (ATS) Accounts
Used to make direct deposits to and payments from checkable deposit account
Provide for the immediate direct transfer of deposit amounts
Money Market Securities
Debt instruments or securities with maturities of one year or less
Short term debt obligation issued by the U.S federal government to meet its short term borrowing needs when imbalance exist between tax revenues and government expenditures
Negotiable Certificate of Deposit (negotiable CD)
Short term debt interments issued by depository institutions to individual or institutional depositors
Short term unsecured promissory note issued by a high credit-quality corporation
Promise of future payment issued by a firm and guaranteed by a bank
short term debt security sold by a business firm or financial institution to another business or institution where the seller agrees to repurchase the security at a specified price and date
short term loans, usually with maturities of one day to one week, made between depository institutions
M1 Money Supple
Consists of currency, travelers checks, demand deposits and other checkable deposits at depository institutions
M2 Money Supply
M1 plus highly liquid financial assets, including savings accounts, small time deposits and retail money market mutual funds
Money Market Mutual Funds
Issue shares to customers and invest the proceeds in highly liquid, short maturity, interest bearing debt instruments called money market investments
Provide predetermined credit limits to consumers at the time the cards are issued
Velocity of Money
Measures the rate of circulation of the money supply
A rise or increase in prices of goods and services that is not offset by increases in their quality
Currency Exchange Rate
The value of one currency relative to another
Gross Domestic Product
A measure of the output of goods and services in the economy
A single currency that has replaced the individual currencies of some of the member countries of the European Union
T/F: A bimetallic standard is a monetary standard based only on gold
FALSE. Gold and silver
T/F: Fiat money is legal tender proclaimed to be money by law
T/F: The use of continentals led to a long period of distrust of paper money
T/F: A store of purchasing power is the most important function of money
T/F: According to the Breeon Woods agreement, one once of gold is set equal to the US $35, and each participating country pegs its currency to gold or the US dollar
T/F: The bimetallic standard was difficult to maintain because the market ratio between silver and gold changed constantly
T/F: The fast the rate of circulation of the money supply, the greater the output of goods and services in an economy
T/F: M1 money supply consists of currency, travelers checks, demand deposits, and other checkable deposits
T/F: Money is perfectly liquid
T/F: Fiat money is paper money fully backed by a precious metal such as gold
T/F: M3 money supply includes M2 plus large time deposits and institutional MMMFs, repurchase agreements and Eurodollar deposits
T/F: The role of financial institutions in a country's financial system is to accumulate and invest savings
Paper money fully backed by a precious metal and issued by the government is called...
Which of the following statements are correct?
a. debit cards provide for the immediate direct transfer of deposit accounts
b. Debit cards may be used for cash advances, even when there is not sufficient money in the account
c. Debit cards may not be used to make cash withdrawals from automatic teller machines
d. all of the above
e. none of the above
Traveler's checks are included in which of the following money supply definitions?
Which of the following statements about greenbacks is false?
a. Greenbacks were money used by the U.S government to help finance the Civil War
b. Greenbacks were fiat money
c. Greenbacks were not redeemable for gold or silver
d. All of the above
Which of the following statements is false?
a. Money can always function as a store of purchasing power, even if its value is relatively unstable
b. The ease with which an asset can be exchanged for money or other assets is referred to as liquidity
c. Credit money is any circulating medium which has little intrinsic value relative to its monetary value
d. In the future, electron funds transfer system may be used to such an extent that a virtually check less society may result
The function of money that expresses prices and contracts for deferred payments in terms of the monetary unit is referred to as
Standard of value
Barter involves the exchange of
goods and services
Credit money is backed by...
The velocity of money measures...
The broadest definition of money supply is...
A rise in prices not offset by increases in quality is called...
BLANK is money, debit instruments, equality securities and other financial contracts that are backed by real assets and the earning abilities of issuers
BLANK is a promise of future payment issued by a firm and guaranteed by a bank that is used to finance international trade with typical maturities ranging from one to six months
What stage of the conflict management lifecycle occurs when the crisis actually begins?
The law that makes it illegal for employees of the U.S. Companies to make "questionable" or "dubious" contributions to political decision makers in foreign nations is the
15. "Strategic allies" describes the relationship of two organizations that join forces to achieve advantages neither can perform as well alone.
Users of Financial Information: Investors and potential investors
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