investment in several different assets with unrelated, or independent, risks, so that the possible losses are independent events.

the difference between tax revenue and government spending. A positive budget balance is referred to as a budget surplus; a negative budget balance is referred to as a budget deficit.

an institution, such as a mutual fund, pension fund, life insurance company, or bank, that transforms the funds it gathers from many individuals into financial assets.

(of X) the amount of money needed today in order to receive X at a future date given the interest rate.

the movement over time of an unpredictable variable.

an accounting fact that states that savings and investment spending are always equal for the economy as a whole.

a hypothetical market that brings together those who want to lend money (savers) and those who want to borrow (firms with investment spending projects).

the sum of private savings and the government’s budget balance; the total amount of savings generated within the economy.

the principle by which an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged.

describes an asset that cannot be quickly converted into cash with relatively little loss of value.

assets created by pooling individual loans and selling shares in that pool.

describes an asset that can be quickly converted into cash with relatively little loss of value.

a claim on a tangible object that can be used to generate future income.

a financial intermediary that creates a stock portfolio by buying and holding shares in companies and then selling shares of this portfolio to individual investors.

the difference between tax revenue and government spending when government spending exceeds tax revenue; dissaving by the government in the form of a budget deficit is a negative contribution to national savings.

the failure of a bond issuer to make payments as specified by the bond contract.

a situation where the interest rate at which the quantity of loanable funds supplied equals the quantity of loanable funds demanded.

a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investments or investment spending needs of borrowers.

the difference between tax revenue and government spending when tax revenue exceeds government spending; saving by the government in the form of a budget surplus is a positive contribution to national savings.

a financial intermediary that sells policies guaranteeing a payment to a policyholder’s beneficiaries when the policyholder dies.

(of a household) the value of accumulated savings.

a lending agreement between an individual lender and an individual borrower. Loans are usually tailored to the individual borrower’s needs and ability to pay but carry relatively high transaction costs.

a requirement to pay income in the future.

the total inflow of funds into a country minus the total outflow of funds out of a country.

a claim on a bank that obliges the bank to give the depositor his or her cash when demanded.

a principle of asset price determination that holds that asset prices embody all publicly available information. The hypothesis implies that stock prices should be unpredictable, or follow a random walk, since changes should occur only in response to new information about fundamentals.

uncertainty about future outcomes that involve financial losses or gains.

a paper claim that entitles the buyer to future income from the seller. Loans, stocks, bonds, and bank deposits are types of financial assets.

the expenses of negotiating and executing a deal.

a type of mutual fund that holds assets in order to provide retirement income to its members.

the negative effect of budget deficits on private investment, which occurs because government borrowing drives up interest rates.