chapter 13

Question 1

But what determines how much investment a country undertakes?

Answer 1

?

Question 2

What are the main types of financial institutions in the U.S. economy, and what is their function?

Answer 2

?

Question 3

What are the three kinds of saving?

Answer 3

private, public and national

Question 4

What’s the difference between saving and investment?

Answer 4

?

Question 5

How does the financial system coordinate saving and investment?

Answer 5

?

Question 6

How do govt policies affect saving, investment, and the interest rate?

Answer 6

?

Question 7

what is saving?

Answer 7

saving” is just some measure of income minus some measure of expenditure.

For private (household) saving, the measure of income is “disposable income,” or gross income minus taxes (“take-home pay”). The measure of expenditure is consumption.

For public (government) saving, the measure of income is T, total taxes, which is the government’s source of “income.” The measure of expenditure is simply G, government purchases.

In the case of national saving (covered on the next slide), the measure of income is GDP, and the measure of expenditure is Y-C-G

Question 8

GDP formula

Answer 8

Y (GDP) = (C)ONSUMPTION + (I)NVESTMENTS + (G)OVERNMENT PURCHASES + (NX)NET EXPORTS

Question 9

The primary economic function of the financial system is to…

Answer 9

helps match the saving of one person with the investment of another

Question 10

What do financial markets do?

Answer 10

they are institutions through which SAVERS directly provide funds to the BORROWERS.

Sells a bond to the customer who now has a stock or claim to partial ownership of the firm

Question 11

What do financial markets do?

Answer 11

they are institutions through which SAVERS directly provide funds to the BORROWERS.

STock and bond marekets

Sells a bond to the customer who now has a stock or claim to partial ownership of the firm

Question 12

What are financial intermediaries?

Answer 12

institutions through which savers can indirectly provide funds to borrowers

banks and mutual funds

Question 13

Which advantage(s) do mutual funds claim to provide?

Answer 13

diversification and access to the skills of professional money managers

provides a selection of various stocks and bonds for the stockholder to invest in as a portfolio allows people with small amounts o fmoney to diversify their holdings

Question 14

Compared to stocks, bonds offer the holder

Answer 14

higher risk, higher return

Question 15

Given that Monika’s income exceeds her expenditures, Monika is best described as a

Answer 15

saver or supplier of funds

Question 16

perpetuity is distinguished from other bonds in that it

Answer 16

never matures

Question 17

bond

Answer 17

debt finance
gives the purchacer/saver an IOU
gets paid first if the company i sin financial trouble

during a civil war, the bond interest will be higher than regular time

Question 18

Compared to stocks, bonds offer the holder

Answer 18

lower risk and lower percentage return

Question 19

bond

Answer 19

debt finance
gives the purchacer/saver an IOU
gets paid first if the company i sin financial trouble

Question 20

investment vs savings

Answer 20

investment is goods that are being consumed like an oven or a mortgage on a house

savings is involves income that is not consumed.

Question 21

public savings

Answer 21

Taxes - Government spending T-G

Question 22

Private Savings

Answer 22

(y)total income -(C)consumption- (T) tax they pay

Question 23

national savings

Answer 23

public savings +private savings (Y-T-C) + (T-g)

Question 24

y

Answer 24

GDP for country or income for private savings equations

Question 25

c

Answer 25

personal consumption

Question 26

policy : Tax incentives for saving increase the supply of Loan-able Funds

Answer 26

reduces the equilibrium rate and increases the quantity of loan-able funds ( shifts the supply curve to the right)

Question 27

what if public saving is positive?

Answer 27

adds to national saving and the supply of loanable funds.

Question 28

what if public saving is negative

Answer 28

reduces national saving and the supply of loan-able funds

Question 29

an increase in the interest rate...

Answer 29

makes saving MORE attractive, which increased the quantity of loan-able funds supplied.

Question 30

the demand for loan able funds comes from what?

Answer 30

firms borrow funds they need to pay for new equipment households borrow the funds they need to purchase new houses.

Question 31

what does a fall in the interest rate do?

Answer 31

reduces the cost of borrowing, which INCREASES the quantity of loanable funds demanded.

Question 32

The interest rate adjusts to equate supply and demand then..

Answer 32

the equilibrium of loanable funds equals equilibrium investment and equilibrium saving.

Question 33

Policy: Investment tax credit increase the demand for loan-able funds

Answer 33

raises the equilibrium rate and increases the equilibrium of loanable funds.

Question 34

what does a budget deficit do?

Answer 34

reduces national saving and the supply of loanable funds... which shifts curve to the left.

Question 35

what is crowding out

Answer 35

increase in budget deficit causes a fall in investment. the govt. borrows to finance its deficit, leaving less funds available for investment.

Question 36

what is investment good for?

Answer 36

it is important for long-run economic growth. so budget deficits reduce the economys growth rate and future standard of living.

Question 37

the US Debt

Answer 37

the govt finances deficits by borrowing (govt. bonds) persistent deficits lead to a rising govt. debt. the ratio of govt debt to GDP is a useful measure of government's indebtedness relative to ita abiltiy to raise tax revenue historically the debt-gdp ratio usually rises during wartime and falls during peactime-- until early 1980's

Question 38

one of the tem principles of chpater 1

Answer 38

Markets are usually a good way to organize economic activity

Question 39

elaborate on what?

Answer 39

Financial markets help allocate the economy's scarce resources to their most efficient uses.

Question 40

what significance does financial markets do to link the present to the future.

Answer 40

?