Chapter 10

Question 1

Savings-Investment Spending Identity

Answer 1

Savings and Investment spendings are always equal

Question 2

who pays for private investment spendings?

Answer 2

individuals create capital with other people’s money and savings

Question 3

Investment Spending in a closed economy (2)

Answer 3

no imports or exports (no trade)

savings=investment spendings

Question 4

why does income of economy=spending in a closed economy?

Answer 4

one person’s spendings is another person’s income

Question 5

Total Income Equation

Answer 5

GDP=C+G+S

Question 6

Total Spendings Equation

Answer 6

GDP=C+G+I

Question 7

Budget Surplus

Answer 7

Tax Revenue > Government Spendings= high savings

Question 8

Budget Deficit

Answer 8

Tax Revenue < Government Spendings= low savings

Question 9

Budget Balance

Answer 9

Difference between tax revenue and government spending, positive=surplus, negative=deficit

Question 10

National Savings

Answer 10

Sum of private savings(household) (GDP-T+TR-C) and public savings(government)

Question 11

Investment Spending Identity in open economy (2)

Answer 11

• open to trade so money flows in and out

- savings of people in one country can be used to finance investment spendings in another

Question 12

3 types of capital and description

Answer 12

physical - manufactured aids ex machine
human - education and skills and knowledge of labour force ex university
financial - funds from savings used for investments ex stocks

Question 13

Inflow of Funds (capital inflows)

Answer 13

Foreign savings that finance domestic investment

Question 14

outflow of funds (capital outflows)

Answer 14

domestic savings that finance foreign investment

Question 15

Net Foreign Investment

Answer 15

total outflow of funds - total inflow of funds

Question 16

NFI<0 (2)

Answer 16

• foreigners invest more on country then country invest more on other countries
• country borrows funds

Question 17

In a open economy savings=

Answer 17

investments plus net foreign investments

Question 18

Financial Markets

Answer 18

Channel savings of households as investments to businesses that want to borrow money so they can invest

Question 19

loanable funds market

Answer 19

simplified financial market with one interest rate, where suppliers of funds come together with borrowers of funds

Question 20

price of a loan is the

Answer 20

nominal interest rate: what loaner chargers for when they lend funds

Question 21

Demand for loanable funds graphical analysis

Answer 21

interest rate is low, more funds demanded as less interest to pay back

interest rate is high less funds demanded as person needs to pay back more interest so they would rather loan their funds to gain interest

Question 22

supply of loanable funds graphical analysis

Answer 22

interest rate is high- more beneficial for lender to lend funds and gain interest

interest rate is low- more beneficial for lenders to invest in project or borrow funds

Question 23

At the Equilibrium interest rate (return rate) (3)

Answer 23

the right projects are funded when they are profitable at interest rate higher or equal to eqbm
- right people do savings when lenders charge eqbm interest or less

Question 24

when demand curve of loanable funds is higher then market eqbm interest rate (top left)

Answer 24

projects interest rate (project return) is higher then the loan interest rate price so firms will invest and take out a loan to finance project

Question 25

when demand curve of loanable funds is lower then market eqbm interest rate (bottom right)

Answer 25

the interest rate (return of project) is lower then the market interest rate price, so firms do not take out a loan to finance the project

Question 26

when supply curve of loanable funds is higher then market interest rate (top right)

Answer 26

supplier is offering interest rate higher then market so borrowers do not accept loans

Question 27

when supply curve of loanable funds is lower then market interest rate

Answer 27

supplier if offering interest rate lower then market so borrowers accept loans

Question 28

factors that can cause demand curve for loanable funds to shift (2)

Answer 28

- changes in perceived business opportunities | - changes in gov policies

Question 29

demand shifting to right (2)

Answer 29

- tax credit for investment - borrows can accept funds at higher interest then before because projects are returning better then before (can still make money at higher interest)

Question 30

shift of supply of funds (2)

Answer 30

- change in private savings | - change in government budget balance

Question 31

change in private savings supply shift

Answer 31

people save more so less funds available to loan so shift left (people think inflation could beat interest) people save less so more funds available to loan so shift right (house gets bonus cheque)

Question 32

crowding out and shift of supply of loanable funds

Answer 32

occurs when budget balance is negative, gov needs to borrow funds so supply of loanable funds shift left as less funds available for consumers (less investment spending), this also causes interest rate to increase

Question 33

crowding out shifts supply to the____ and demand to the ____ and how to reduce a deficit the demand curve would have to shift

Answer 33

left, right,left

Question 34

global loanable funds market

Answer 34

equalizes interest rate across countries

Question 35

canada interest rate is 6% and britains is 2% what will happen for global investing and borrowing

Answer 35

canada will borrow from britain instead of canada as they can pay back interest at lower rate people in britain will loan to canada instead of britain as they can charge higher interest on their loans

Question 36

when global interest rate is lower then domestic interest rate

Answer 36

demand of funds increase down the curve, loaners don't want to loan as much funds now as the interest rate fell, this creates excess demand so country needs capital inflow

Question 37

when global interest rate is higher then domestic interest

Answer 37

demand of funds decreased up the curve, loaners want to loan more funds as higher rate of return, there is excess supply of loans which is loaned to other country as capital outflow

Question 38

changes in interest rate shift what and are caused by (3)

Answer 38

- shift of supply and demand - changes in gov policy - expectations of future inflation

Question 39

real interest rate equation and is also known as the true

Answer 39

nominal interest rate - inflation rate (true cost of borrowing)

Question 40

do loan contracts specify inflation rate

Answer 40

no because no one knows inflation rate so they express nominal interest rate

Question 41

Fisher Effect and how it drives nominal interest rate | does the real interest rate fluctuate or is it fixed (slides 29 and 30)

Answer 41

real interest rate is unaffected by changes in expected future inflation (it is fixed after changes) ex expected high inflation increases nominal interest rate

Question 42

financial system (4) and description of each

Answer 42

- wealth: value of HH accumulated savings - financial asset: paper claim that entitles buyer to future income from seller - physical asset: object that can be used to make future income - liability: requirement to pay income in future

Question 43

well functioning financial system

Answer 43

- critical for achieving growth | - channels savings into investment efficiently

Question 44

present value of x in the future and formula

Answer 44

how much money persons needs to take out x in the future after gaining interest. PV=FV/((1+r)^t)

Question 45

firms invest if........ and meaning

Answer 45

present value of a future return is > the current value of investment for the same future return - meaning instead of lending funds they invest money as its cheaper for the return