Banks, Money and the Credit Market

A medium of exchange used to purchase goods or services. Money allows purchasing power to be transferred among people and everyone must trust that others will accept your money as payment

Stock of things owned or value of that stock

The amount of money one recieves over some period of time (flow)

Reduction in the value of a stock of wealth over time

The maximum amount tjhat one could consumer without running down wealth. Gross income - depreciation

Wages, salaries and other income from labour

Income that is not consumed

Expenditure on newly produced capital goods

There is a trade-off between consuming goods now and later. The opportunity cost of having more goods niw is having fewer goods later. Borrowing and lending allow us to rearrange out capacity to buy goods and services across time

The price of bringing soem buyer power forward in time

Trade-off between current and future consumption (MRT)

This curve plots all combinationation of goods that yield the same level of utility to the individual (isoutility curves)

The value of an additional unit of consumption declines the more consumption the individual has. An individual smoothes their consumption to avoid consuming a lot in one period and little in another

People experience the present satisfaction more strongly than the same satisfaction later

People know that they may not be around in the future and so they want to consume now

A measure of a person's impatience. Indivuals borrows at the point when discount rate equals interest rate

All of the points at which the individual would be just as well off as at the reservation position (endowment)

A saver smoothes his consumption by postponing it into the future. Lending money at interst expands the saver's feasible set, compared to simply storing it

Summarises what the household or firm owns and what it owes to others

Anything of value that is owned

Anything value that is owed

Assets-liabilities

A firm that ameks profits by lending and borrowing. Banks borrow from households (deposits). The interest they pay on deposits is lower than the interest they charge on loans hence they make profits

Notes and coins. Money as legal tender

Has to be accepted as payment by law. The central bank is the only bank that can create legal tender

Base money + bank money

Deposits can be withdrawn at any time but loans only need to be repaid after a specified time.

Deposits are liquid and loans to borrowers are frozen

Situation when all depositors demand their money at once and can result in bank failure

The interest rate on base money set by the central bank

The average interwst rate charged by commercial banks to firms and households

Operational and interest costs

Interest and repayment of loans

Negative net worth

Describes the reliance of a company on debt (total assets/net worth)

A conflict of interest between principal and agent, about some hidden action or attribute of the agent that cannot be enforces or guaranteed in a binding contract

When those with less wealth borrow on unfavourable terms compared with those with more wealth (credit-constrained) or are refused loans entirely (credit-excluded)