Ch. 27

Present Value- Amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money
Future Value- Amount of money in the future that an amount of money today will yield, given prevailing interest rates
Compounding- Accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future
Risk Aversion- a dislike of uncertainty
Diversification- the reduction of risk achieved by replacing a single risk with a large number of smaller, unrelated risks
Firm-specific risk- risk that affects only a single company
Market risk- risk that affects all companies in the stock market
Fundamental analysis- the study of a company's accounting statements and future prospects to determine its value
Efficient markets hypothesis- theory that asset prices reflect all publicly available information about the value of an asset
Informational Efficiency- the description of asset prices that rationally reflect all available information
Random Walk- the path of a variable whose changes are impossible to predict

Ch. 26

Chapter 26 is about savings, investments, and the financial system.
Financial institutions are:
stock market
banks
mutual funds
help households save their income
Savings must equal investments in a closed economy
Price and Quantity of savings and interest rate are also governed by a supply and demand graphs
Market for loanable funds is created with:
borrowing
lending
analyze using supply and demand graphs
Bonds are simply an IOU
Equilibrium interest rate and amount of loanable funds are affected by:
tax policies
budget surpluses and deficits

Ch 24

Chapter 24 is about measuring the cost of living.
The cost of living is measured by consumer price index.
That is a measure of the overall cost of goods and services bought by a consumer.
-This uses the ratios of cost of the many goods and services
There are five steps to find CPI.
-Fix the basket
-Find the prices
-Compute the basket's cost
-Choose a base year and compute the index
-Compute the inflation rate
To calculate inflation you find the percent change in the CPI from year a to year b.
CPI is difficult to measure because of
-substitution bias
-increased variety in products for the customer
-changes in the quality of goods and services

Ch 23

The chapter's focus is on GDP, which measures the total income and total expenditure of the economy or the market value of all final goods and services within in a country in a given period of time. It is calculated as the sum of consumption, investment, government purchases, and net exports. GDP can rise over time because of an increase in output or an increase in prices, so we can distinguish between  Real GDDP and Nominal GDP.