Chapter 26

Question 1

financial system

Answer 1

group of institutions in the economy that help to match one persons saving with another person investment

Question 2

categories of financial institutions

Answer 2

financial markets and financial intermediaries

Question 3

categories of financial markets

Answer 3

stock market and bond market

Question 4

categories of financial intermediaries

Answer 4

banks and investment funds

Question 5

financial market

Answer 5

institutions through which savers can DIRECTLY provide funds to borrowers

Question 6

financial intermediaries

Answer 6

financial institutions through which savers can INDIRECTLY provide funds to borrowers

Question 7

bond

Answer 7

IOU

• when loan will be repaid
• rate of interest

Question 8

stock

Answer 8

ownership in a firm

share or equity

Question 9

equity financing

Answer 9

sale of stock to raise money

Question 10

investment fund

Answer 10

institution that sells shares to the public (then buys portfolio)

Question 11

GDP formula (and values of each variable)

Answer 11

Y = C + I + G  + NX
y= GDP
C = consumption
I = investment
G = government purchases
NX = net exports

Question 12

closed economy

Answer 12

does not interact with other economies in trade

Question 13

closed economy formula

Answer 13

Y = C + I +G

Question 14

National saving or saving

Answer 14

total income in economy after paying for consumption and government purchases

Question 15

national saving formula

Answer 15

Y - C -G = I

S = I

Question 16

national saving long formula

Answer 16

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

Question 17

private saving

Answer 17

the amount of income that households have left after paying their taxes and paying for their consumption

Question 18

private saving formula

Answer 18

= (Y - T - C)

Question 19

public saving

Answer 19

the amount of tax revenue that the government has left after paying for its spending

Question 20

public saving formula

Answer 20

(T - G)

Question 21

budget surplus

Answer 21

T>G receives more money than it spends

Question 22

budget deficit

Answer 22

G > T spends more money than it receives in tax revenue

decreases the supply of loanable funds

Question 23

T

Answer 23

government collects from households in taxes - transfer payments

Question 24

market for loanable funds

Answer 24

the market in which those who want to save supply funds and those who want to borrow to invest demand funds

Question 25

government policies that affect saving and investment (3)

Answer 25

taxes and saving taxes and investment government budget deficits

Question 26

Saving Incentives

Answer 26

change in tax law creates greater saving result: lower interest rate and greater investment - supply increases

Question 27

Investment Incentives

Answer 27

investment tax credit increases the incentive to borrow | - higher interest rate, greater saving (demand goes up)

Question 28

debt

Answer 28

accumulation of past budget deficits

Question 29

crowding out

Answer 29

government increases spending which reduces money available to businesses (investment goes down)

Question 30

government reduces national saving

Answer 30

interest rate rises and investment falls

Question 31

a budget surplus

Answer 31

increases the supply of loanable funds, reduces the interest rate

Question 32

banks

Answer 32

take deposits from people who want to save and use the deposits to make loans to people who want to borrow

Question 33

interest rate is the price of

Answer 33

price of the loan