Extra Credit (Fall 2009)

Glossary

Bubble—Trade in assets with inflated values.

Collateral—A financial asset, such as savings, stock, or a purchased asset, that a lender can seize if a borrower fails to repay a debt.

Credit—The amount of loanable funds available to borrowers.

Federal funds rate target—The interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight; targeted by the Federal Open Market Committee, the principal policymaking body of the Federal Reserve, through open market operations.

Liquidity—The degree to which a financial item such as an asset or security is able to be bought or sold within a market without significantly affecting the price of the asset or losing much of its value.

Monetary policy—The actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals.

Mortgage-backed securities—Securities backed by home mortgages pooled together and securitized.

Open market operations—Purchases and sales of U.S. Treasury and federal agency securities; the Federal Reserve's principal tool for implementing monetary policy.

Recession—A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Securitization—Pooling loans into standardized securities backed by those loans, which can then be traded like any other security.

Sources: Definitions were derived from the following: www.federalreserve.gov/monetarypolicy/fomc.htm, wwwdev.nber.org/cycles/cyclesmain.html, www.financialdict.org/definition/market-liquidity.php, www.federalreserve.gov/fomc/fundsrate.htm, www.stlouisfed.org/education_resources/assets/lesson_plans/paycheck/It's%20Your%20Paycheck_complete.pdf, and Zvi Bodie, Alex Kane, and Alan J. Marcus, Essentials of Investment, 7th ed., (New York: McGraw Hill, 2008).

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