chap 13

Question 1

financial system

Answer 1

the group of institutions that helps match the saving of one person with the investment of another

Question 2

financial markets

Answer 2

institutions through which savers can directly provide fund to borrowers

Question 3

bond

Answer 3

in the bond market, a certificate of indebtness

Question 4

stock

Answer 4

in the stock market, a claim to partial ownership in a firm

Question 5

financial intermediaries

Answer 5

institutions through which savers can indirectly provide funds to borrowers

Question 6

mutual funds

Answer 6

institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds

Question 7

elements of financial crises

Answer 7

large decline in some asset prices
insolvencies at financial institutions
decline in confidence in financial institutions
credit crunch
economic downturn
vicious circle

Question 8

private saving

Answer 8

the portion of households’ income that is not used for consumption or paying taxes

Question 9

private saving equation

Answer 9

= Y - T - C

Question 10

public saving

Answer 10

tax revenue less government spending

Question 11

public spending equation

Answer 11

= T - G

Question 12

national saving

Answer 12

the portion of national income that is not used for consumption or government purchases, private saving plus public saving

Question 13

national saving equation

Answer 13

= (Y - T - C) + (T - G)

= Y - C - G

Question 14

saving in a closed economy equals

Answer 14

investment (I)

Question 15

investment in a closed economy is

Answer 15

national saving equation

Question 16

budget surplus

Answer 16

an excess of tax revenue over gov’t spending

= T - G = +public saving

Question 17

budget deficit

Answer 17

a shortfall of tax revenue from gov’t spending

= G - T = -public saving

Question 18

investment

Answer 18

is the purchase of new capital

Question 19

slope of the supply curve is

Answer 19

positive, as interest rate goes up people save more, so supply of loanable funds increases

Question 20

the supply of loanable funds comes from

Answer 20

saving, households with extra money can loan it and earn interest

Question 21

the demand of loanable funds comes from

Answer 21

investment, firms borrow the funds they need to pay for new equipment, households borrow the funds they need to purchase houses/etc

Question 22

the slope of the demand curve is

Answer 22

negative, fall in interest rate reduces cost of borrowing, so more people are willing to take out loans, more loanable funds are demanded

Question 23

equilibrium (loanable funds)

Answer 23

it equals eq’m investment and eq’m saving

Question 24

shift in supply curve

Answer 24

tax incentives for saving shifts the curve right

Question 25

shift in demand curve

Answer 25

investment tax credit increases demand, shifts curve right

Question 26

the axises on the loanable funds curves

Answer 26

y-axis: interest rate | x-axis: loanable funds

Question 27

crowding out

Answer 27

the gov't borrows to finance its deficit, leaving less funds available for investment

Question 28

how does the government finance deficits?

Answer 28

by borrowing/selling government bonds

Question 29

how to measure the government's indebtedness relative to its ability to raise tax revenue

Answer 29

the ratio of gov't debt to GDP