Vocabulary
Financial Sector
A network of institutions that link borrowers and lenders
What is a Bond?
a loan made to a government, business, or individual that must be repaid with interest.
In general, the higher the liquidity of an asset, the _____the rate of return.
lower
Nominal Inflation = 8%
Inflation = 3%
Real Interest Rate =
5%
Liquidity
The ease with which an asset can be converted into money
If interest rates increase, bond prices will...
decrease
What are the 3 functions of money?
medium of exchange, unit of account, store of value
Real Interest Rate = -2%
Inflation = 7%
Nominal =
5%
Nominal Interest Rates
The stated interest rate without adjusting for inflation
What is a stock?
partial ownership in a corporation
Classifying money....Cash in your wallet
M0
When the real interest rate is negative, lenders______ purchasing power because inflation erodes the value of the money they are repaid.
LOSE
Real Interest Rate
Interest rate adjusted for inflation
Why do bonds and interest rates have an inverse relationship?
When interest rates change, new bonds become more or less attractive, so the prices of existing bonds adjust to remain competitive.
Classifying money....Certificate of Deposit (CD)
M2
Inflation ______the purchasing power of money because each unit of currency buys fewer goods and services over time.
Reduces
Medium of Exchange
Money used to buy goods and services
Which financial asset pays a fixed interest payment?
bond
Classifying money....Savings account
M1
Nominal interest rate = 5%
Inflation rate = 7%
Real interest rate = _______%
-2%