ch.26 Flashcards
(32 cards)
What is the financial system?
The group of institutions in the economy that helps to match one person’s saving with another person’s investment.
Name the two main types of financial institutions.
- Financial markets
- Financial intermediaries
What is the function of financial markets?
Institutions through which savers can directly provide funds to borrowers.
What is the function of financial intermediaries?
Institutions through which savers can indirectly provide funds to borrowers.
What does the bond market allow?
Corporations and governments to borrow directly from the public through selling bonds.
Define a bond.
A certificate of indebtedness.
What are the three characteristics of debt finance?
- Term
- Credit risk
- Tax treatment
What does the stock market allow?
Firms to raise money by selling ownership in the firm.
Define a stock.
A claim to partial ownership in a firm.
What do banks do?
Take in deposits from savers and use the deposits to give loans to borrowers.
What are mutual funds?
Institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds.
What is national saving (S)?
The total income in the economy that remains after paying for consumption and government purchases.
What is the national income accounting identity?
Y = C + I + G + NX
In a closed economy, how is investment (I) calculated?
I = Y - C - G
What is private saving?
The income that households have left after paying for taxes and consumption.
What is public saving?
The tax revenue that the government has left after paying for its spending.
Define budget surplus.
An excess of tax revenue over government spending.
Define budget deficit.
A shortfall of tax revenue from government spending.
If GDP equals $10 trillion, consumption equals $6.5 trillion, and government spending is $2 trillion, what is the public saving?
Public saving = T - G = -0.3
Calculate private saving if Y = 10, T = 1.7, and C = 6.5.
Private saving = Y - T - C = 1.8
What happens to national saving if consumers save the full proceeds of a tax cut?
National saving is unchanged, so investment is unchanged.
What is the market for loanable funds?
The market in which those who want to save supply funds and those who want to borrow to invest demand funds.
What does an increase in the interest rate do to the supply of loanable funds?
Makes saving more attractive, which increases the quantity of loanable funds supplied.
What is the effect of tax incentives for saving?
They increase the supply of loanable funds.
