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Macroeconomics > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

Financial capital

A

the funds that firms use to buy physical capital and that households use to buy a home or invest in human capital

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2
Q

Gross investment

A

total amount spent on new capital

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3
Q

net investment

A

change in quantity of capital

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4
Q

net investment equals

A

gross investment minus depreciation

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5
Q

wealth or net worth

A

the value of all the things people own, the market value of their assets @ a point in time

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6
Q

saving

A

the amount of income that is not paid in taxes or spent on consumption of goods and services

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7
Q

capital gains

A

increase in wealth from the market value of assets rising

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8
Q

3 types of financial markets

A
  • loan markets
  • bond markets
  • stock markets
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9
Q

mortgage

A

a legal contract that gives ownership of a home to the lender in the event that the borrower fails to meet the agreed payment schedule

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10
Q

bond

A

a promise to make specified payments on specified dates

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11
Q

bond market risk

A

safe and return is usually small

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12
Q

stock market risk

A

higher risk, volatile, return can be bigger

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13
Q

term to maturity (bond)

A

the length of time till the bond matures

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14
Q

yield curve (bond)

A

the relationship between the term of a bond and the interest rate
usually the longer the term the higher the interest rate so the yield curve slopes upward

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15
Q

stock

A

certificate of ownership and claim to firms profits

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16
Q

stock market

A

a financial market in which the shares of stocks of corporations are traded

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17
Q

financial institutions

A

a firm that operates on both sides of the markets for financial capital. It borrows from one market and lends to another

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18
Q

the 6 key Canadian financial institutions

A
  • banks
  • trust and loan companies
  • credit unions and cassies populaires
  • mutual funds
  • pension funds
  • insurance companies
19
Q

financial institution net worth

A

the market value of what a financial institution has lent minus the market value of what it has borrowed

20
Q

solvent

A

if the institutions net worth is postive

21
Q

insolvent

A

if the institutions net-worth is negative

22
Q

3 sources that investment finance comes from

A

1.) household savings
2.) gov budget surplus
3.) borrowing from the rest of the world

23
Q

net taxes

A

taxes paid to gov minus cash transfers received from gov

24
Q

income (y) =

A

sum of consumption expenditure, saving and net taxes
Y= C + S - T

25
Q

Investment (I) =

A

I = Savings + (Taxes-Gov. Expenditure) + (Imports-Exports)

26
Q

what is (T-G)

A

Government Budget Surplus

27
Q

nominal interest rate

A

the number of dollars that a borrower pays and a lender receives in interest in a year expressed as a percentage of the number of dollars borrowed and lent

28
Q

the real intrest rate

A

the nominal intrest rate adjusted to remove the effects of inflation on the buying power of money. It is aprox equal to the nominal intrest rate minus the inflation rate

29
Q

the loanable funds market

A

the aggregate of all the indvidual markets in which households, firms, governments, banks and other financial institutions borrow and lend

30
Q

2 factors that determine investment and the demand for loanable funds to finance it

A

1.) the real interest rate
2.) expected profit

31
Q

the demand for loanable funds curve

A

the relationship between the quantity of loanable funds demanded and the real intrest rate when all other influences on borrowing plans remain the same

32
Q

5 factors that influence the decision on how much of your income to save and supply the loanable funds market

A

1.) the real intrest rate
2.) disposable income
3.) expected future income
4.) wealth
5.) default risk

33
Q

supply of loanable funds

A

the relationship between the quantity of loanable funds supplied and and the real intrest rate when all other influences on borrowing plans remain the same

34
Q

what changes the supply of loanable funds (4)

A

a change in
- disposable income
- expected future income
- wealth
- default risk changes

35
Q

disposable income and supply of loanable funds

A

when disposable income increases, other things remaining the same, consumption expenditure increases, but by less than the increase in income , some is saved. This increases the supply of loanable funds

36
Q

disposable income

A

income earned - net taxes

37
Q

expected future income and loanable funds

A

the higher the expected future income (other things remaining the same) the smaller the savings today, the smaller the supply of loanable funds today

38
Q

Wealth and loanable funds

A

the higher a households wealth, other things remaining the same the smaller its saving

39
Q

default risk

A

the risk that a loan will not be repaid

40
Q

default risk and loanable funds

A

the greater the default risk the higher is the intrest rate needed to induce a person to lend and the smaller is the supply of loanable funds

41
Q

gov budget surplus and loanable funds

A
  • increases the supply of loanable funds
  • real intrest rate falls - decreases HH saving and decreases the quantity of private funds supplied
  • lower the real intrest rate, higher QD of loanable funds and higher investment
42
Q

gov budget deficit and loanable funds

A
  • increases demand for loanable funds
  • real intrest rate increases - investment decreases - and QD of loanable funds to finance investment deceases
  • HH saving increases and priv funds supplied increases
43
Q

The crowding out effect

A
  • the tendency for a gov budget deficit to raise the real intrest rate and decrease investment
  • does not decrease investment by full amount of gov budget deficit bc higher real intrest rate induces increase in priv savings that partly contributes to financing the deficit
44
Q

The Ricardo Barro Effect

A
  • holds other effects wrong and says the gov budget has no effect on either real intrest rate or investment
  • taxpayers are rational and can see that budget defcit today means future taxes will be higher and future disposable income will be lower so they save more today
  • the priv supply of loanable funds increases to match the QD by the gov

Macroeconomics (12 decks)

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