Ch. 26: Saving, Investment, and the Financial System – Flashcards
Unlock all answers in this set
Unlock answersquestion
The Financial System:
answer
-Group of institutions in the economy A. Help match: 1. One person's savings with another person's investment
question
Financial Markets:
answer
-Financial institutions: where savers can directly provide funds to borrowers Examples: Bond Market Stock Market
question
The Bond Market
answer
-Sells Bonds: Borrows directly from the public ~Certificate of indebtedness (bonds) ~Time of maturity- at which the loan will be repaid ~Rate of interest Principal- amount borrowed Term-length of time until maturity ~Credit risk ~Tax Treatment
question
The Stock Market
answer
-Sells Stocks Stock: Claim to partial ownership in a firm Organized stock exchanges Stock prices: demand and supply Equity Finance: Sale of stock to raise money Stock Index: Average of a group of stock prices
question
Financial Intermediaries
answer
Financial Institutions where savers can indirectly provide funds to borrowers Examples: Banks Mutual Funds
question
Banks
answer
Take in deposits from savers Pay interest Make loans to borrowers Charge interest Facilitate purchasing of goods and services Checks-medium of exchange
question
Mutual Funds
answer
Institution that sells shares to the public Uses the proceeds to buy a portfolio of stocks and bonds -Advantages 1.Diversification 2.Access to professional money managers
question
Identity
answer
an equation that must be true because of the way the variables in the equation are defined
question
Gross Domestic Product (GDP)
answer
Both the total income and total expenditure
question
Y=C+I+G+NX
answer
Y= GDP C=Consumption I=Investment G=Government Purchases NX=Net Exports *Identity because every dollar of expenditure that shows up on the left side also shows up in one of the four components on the right side
question
A Closed Economy is?
answer
An economy that doesn't interact with any other economies No: International trade or borrowing and lending So: NX=0
question
An Open Economy is?
answer
An economy that interacts with any other economies Actual economies NX≠0
question
Y=C+I+G
answer
States: GDP is the sum of consumption, investment,and government purchases. Each unit of output sold in a closed economy is consumed,invested or bought by the government
question
National Saving or saving is
answer
The total income in the economy that remains after paying for consumption and government purchases Denoted as "S" S=Y-C-G OR If T=taxes minus transfer payments S=(Y-T-C) + (T-G)
question
Private Saving is
answer
The income that households have left after paying for taxes and consumption Y-T-C
question
Public Saving is
answer
Tax revenue that government has left after paying fr its spending T-G
question
Budget Surplus is
answer
Excess of tax revenue over government T-G>0
question
Budget Deficit is
answer
Shortfall of tax revenue from government spending T-G< 0
question
In the Language of macroeconomics, investment refers to....
answer
the purchase of new capital, such as equipment or buildings
question
For the economy as a whole one person's savings can....
answer
finance another person's investment
question
Market for loanable funds
answer
Assume: Only one financial market -All savers go to this market to deposit their saving, and all borrowers go to this market to take out their loans -One interest rate -both the return to saving and the cost of borrowing
question
Loanable Funds refers to:
answer
all income that people have chosen to save and lend out rather than use for their own consumption, and to the amount that investors have chosen to borrow to fund new investment projects.
question
What is the source of the supply of loanable funds?
answer
Saving
question
What is the source of demand for loanable funds?
answer
Investment
question
Price of loan = ?
answer
real interest rate -borrowers pay for a loan -lenders receive on their saving
question
As interest rate rises
answer
1) Quantity demanded declines 2)Quantity supplied increases 3) Demand Curve: Slopes downward 4) Supply curve: Slopes upward
question
Policy 1: Saving Incentives
answer
-Shelter some saving from taxation -Affect supply of loanable funds -increase in supply: supply curve SHIFTS right -New equilibrium *lower interest rate *higher quantity of loanable funds -Greater investment
question
Policy 2: Investment Incentives
answer
-Investment tax credit -Affect demand for loanable funds -Increase in demand: Demand curve SHIFTS right -New Equilibrium *Higher interest rate *Higher quantity of loanable funds -Greater savings
question
Policy 3: Government Budget Deficits and Surpluses
answer
1)Government starts with balanced budget 2)Then starts running a budget deficit a)change in supply of loanable funds b)decrease in supply: supply curve SHIFTS left c)New equilibrium -higher interest rate and smaller quantity of loanable funds 3) Crowding out a)decrease in investment b) results from government borrowing
question
Government Budget Deficit causes
answer
-Interest rate rises -Investment falls due to crowding out 1) Crowding out=decrease in investment due to government borrowing
question
Government Budget Surplus causes
answer
-Increase supply of loanable funds -reduce interest rate -stimulates investment
