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Macroeconomics > Chapter 10 > Flashcards

Chapter 10 Flashcards

1
Q

Savings-Investment Spending Identity

A

Savings and Investment spendings are always equal

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2
Q

who pays for private investment spendings?

A

individuals create capital with other people’s money and savings

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3
Q

Investment Spending in a closed economy (2)

A

no imports or exports (no trade)

savings=investment spendings

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4
Q

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

A

one person’s spendings is another person’s income

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5
Q

Total Income Equation

A

GDP=C+G+S

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6
Q

Total Spendings Equation

A

GDP=C+G+I

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7
Q

Budget Surplus

A

Tax Revenue > Government Spendings= high savings

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8
Q

Budget Deficit

A

Tax Revenue < Government Spendings= low savings

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9
Q

Budget Balance

A

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

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10
Q

National Savings

A

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

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11
Q

Investment Spending Identity in open economy (2)

A
  • open to trade so money flows in and out

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

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12
Q

3 types of capital and description

A

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

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13
Q

Inflow of Funds (capital inflows)

A

Foreign savings that finance domestic investment

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14
Q

outflow of funds (capital outflows)

A

domestic savings that finance foreign investment

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15
Q

Net Foreign Investment

A

total outflow of funds - total inflow of funds

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16
Q

NFI<0 (2)

A
  • foreigners invest more on country then country invest more on other countries
  • country borrows funds
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17
Q

In a open economy savings=

A

investments plus net foreign investments

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18
Q

Financial Markets

A

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

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19
Q

loanable funds market

A

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

20
Q

price of a loan is the

A

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

21
Q

Demand for loanable funds graphical analysis

A

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

22
Q

supply of loanable funds graphical analysis

A

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

23
Q

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

A

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

24
Q

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

A

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

25
Q

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

A

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

26
Q

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

A

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

27
Q

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

A

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

28
Q

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

A
  • changes in perceived business opportunities

- changes in gov policies

29
Q

demand shifting to right (2)

A
  • 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)
30
Q

shift of supply of funds (2)

A
  • change in private savings

- change in government budget balance

31
Q

change in private savings supply shift

A

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)

32
Q

crowding out and shift of supply of loanable funds

A

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

33
Q

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

A

left, right,left

34
Q

global loanable funds market

A

equalizes interest rate across countries

35
Q

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

A

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

36
Q

when global interest rate is lower then domestic interest rate

A

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

37
Q

when global interest rate is higher then domestic interest

A

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

38
Q

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

A
  • shift of supply and demand
  • changes in gov policy
  • expectations of future inflation
39
Q

real interest rate equation and is also known as the true

A

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

40
Q

do loan contracts specify inflation rate

A

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

41
Q

Fisher Effect and how it drives nominal interest rate

does the real interest rate fluctuate or is it fixed (slides 29 and 30)

A

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

42
Q

financial system (4) and description of each

A
  • 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
43
Q

well functioning financial system

A
  • critical for achieving growth

- channels savings into investment efficiently

44
Q

present value of x in the future and formula

A

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

45
Q

firms invest if…….. and meaning

A

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

Macroeconomics (10 decks)

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