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AMORTIZATION: The process of paying off a debt liability and accrued interest through a series of equal, periodic payments. Car loans and mortgages are two debts commonly paid off through amortization. Your monthly car payment, for example, partially pays for interest accrued on the outstanding balance and partly reduces that balance. Because one payment reduces the outstanding balance, each subsequent payment has a smaller portion for interest. If the proper amortization schedule has been calculated, your loan will be paid off with the last payment.

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Lesson 11: Circular Flow | Unit 2: Financial Markets Page: 7 of 22

Topic: The Paper Economy <=PAGE BACK | PAGE NEXT=>

Financial markets divert national income from household consumption to business investment.
  • Real side: Goods and resources, physical production used to satisfy wants and needs.
  • Paper side: Legal claims on these physical goods and resources. Examples: Corporate stocks, government bonds, money, bank statements, mortgage contracts.
  • Trading legal claims through financial markets diverts income from consumption to investment.
  • A legal claim buyer gets the legal claim, but gives up income. The legal claim seller gives up the claim and takes possession of the income.
  • Income is diverted from a legal claim buyer (lender, saver) to a legal claim seller (borrower) through the financial markets.Two additional flows: Saving and Investment.

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SEIGNIORAGE

The difference between the face value, or value in exchange, of money and the cost of producing the money. This seigniorage is effectively the profit government generates from producing currency--printing paper bills or minting metal coins. That is, government effectively "makes money" by making money.

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Today, you are likely to spend a great deal of time flipping through mail order catalogs seeking to buy either a birthday gift for your father that doesn't look like every other birthday gift for your father or a green fountain pen. Be on the lookout for slow moving vehicles with darkened windows.
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Okun's Law posits that the unemployment rate increases by 1% for every 2% gap between real GDP and full-employment real GDP.
"Anyone who has never made a mistake has never tried anything new. "

-- Albert Einstein, physicist

AGI
Adjusted Gross Income
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