Module 22
May 2015



Interest rate – the price, calculated as a % of
the amount borrowed, charged by lenders to
borrowers for the use of their savings for one
year
Savings-investment spending identity –
savings and investment spending are always
equal for the economy as a whole
Budget surplus – the difference between tax
revenue and government spending when tax
revenue exceeds government spending




Budget deficit – the difference between tax
revenue and government spending when
government spending exceeds tax revenue
Budget balance – the difference between tax
revenue and government spending
National savings – the sum of private savings
and the budget balance, is the total amount
of savings generated within the economy
Capital inflow-is the net inflow of funds into
a country




Wealth – the value of a household’s
accumulated savings
Financial asset – a paper claim that entitles
the buyer to future income from the seller.
Physical asset – a claim on a tangible object
that gives the owner the right to dispose of
the object as he or she wishes
Liability – a requirement to pay money in the
future





Transaction costs – the expenses of negotiating
and executing a deal
Financial Risk – uncertainty about future
outcomes that involve financial losses
Diversification – investing in several different
assets so that the possible losses are
independent events
Liquid – can be quickly converted into cash
without much loss of value
Illiquid – cannot be without much loss of value



Loan – a lending agreement between an
individual lender and an individual borrower
Default – when a borrower fails to make
payments as specified by the loan or bond
contract
Bond – an IOU issued by the borrower, usually
the seller agrees to a fixed amt of interest
each year and agrees to settle the IOU on a
specific date.


Loan-backed Securities – an asset created by
pooling individual loans and selling shares in
that pool.
Stock – a share in the ownership of a
company. A share of stock is an asset for the
buyer and a liability for the company – risk
tolerance



Financial intermediary is an institution that
transforms the funds it gathers from many
individuals into financial assets
Mutual funds – a financial intermediary that
creates a stock portfolio and then resells
shares of this portfolio to individual investors
Pension fund – a type of mutual fund that
holds assets in order to provide retirement
income to its members



Life insurance company – sells policies that
guarantee a payment to a policyholder’s
beneficiaries when the policyholder dies
Bank deposit – a claim on a bank that obliges
the bank to give the depositor his or her cash
when demanded
Bank – is a financial intermediary that
provides liquid assets in the form of bank
deposits to lenders and uses those funds to
finance the illiquid investment spending
needs of borrowers.