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macroeconomics > chapter 8 > Flashcards

chapter 8 Flashcards

1
Q

how do people obtain financial resources to start businesses and expand current businesses?

A

people saving their money in a bank and people borrowing that saved money from the bank to invest in their company

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2
Q

what are financial systems?

A

a group of financial institutions in the economy that help match ones savings with another persons investments

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3
Q

how do financial institutions match ones savings with another persons investments?

A

when people save their money at the bank it allows the bank to lend that saved money out to people to use to invest

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4
Q

a population with high saving rates will typically have more access to what?

A

financial/ capital resources

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5
Q

if you do not have enough of their own savings to expand their business what will they need to do?

A

you will need to convince someone to give them their savings in a form of investment, in return you will have to give them a cut of your profits

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6
Q

what are the 2 categories financial institutions can be grouped in to?

A

financial markets
financial intermediaries

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7
Q

what are financial markets?

A

financial markets are institutions that directly match people who want to save with people who want to borrow

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8
Q

what do financial markets do?

A

allow for the trade of various financial instruments to facilitate the matching process between savers funds and borrowers needs

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9
Q

what are the 2 important financial markets?

A

bond market
stock market

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10
Q

what is the bond market?

A

a marketplace for trading debt securities (bonds)

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11
Q

what are the 2 types of bonds?

A

corporate bonds
government bonds

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12
Q

what is the difference in risk between corporate bonds and government bonds?

A

corporate bonds are higher risk
government bonds are lower risk

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13
Q

how do bonds work?

A

they send saver funds to the borrower with an expected, predetermined return, contracted by the bond agreement

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14
Q

what are the 2 characteristics of bonds:

A

terms/ date of maturity
credit risk

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15
Q

when a borrowers/ issuer of bond is given a credit rating, what does that credit rating represent?

A

their default risk

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16
Q

when companies issue bonds to raise capital what is that called?

A

debt financing

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17
Q

what is the stock market?

A

a marketplace for trading shares of ownership title of companies

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18
Q

how does the stock market work?

A

saver purchases a share/ ownership title of a company and therefore gets a claim to some of the companies profits

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19
Q

what do purchasing stocks offer to the purchaser buying the stock?

A

it offers the holder of the stock higher reward but potentially higher risk

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20
Q

when companies sell their stocks to raise capital what is it called?

A

equity financing

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21
Q

since saving and investing play a crucial role in long run economic growth what are 2 incentives do investors receive to encourage people to save and invest?

A

reduced capital gains tax
absolute priority rule

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22
Q

what is the absolute priority rule?

A

if a company/ borrower defaults and goes bankrupt creditors/ lenders (savers/ investors) get priority of borrowers liquidated assets in the order of most to least invested

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23
Q

why is the absolute priority rule enforced?

A

it is done to protect the investors who contribute the most to a company

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24
Q

what are financial intermediaries?

A

they are institutions that directly match savers with borrowers to fund capital investments

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25
Q

what are the 2 most important financial intermediaries?

A

banks
mutual funds

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26
Q

what are banks?

A

they are financial intermediaries who’s primary function is to take deposits from savers and use these deposits to make loans to people who want to borrow

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27
Q

how does interest work on deposits and loans at a bank?

A

the bank offers depositors some interest on their deposits and charge the borrower a slightly higher interest on their loan

28
Q

what are mutual funds?

A

investment vehicles that pool money collected by many investors to invest in securities like stocks, bonds and other assets

29
Q

what is the benefit of mutual funds?

A

they allow for diversification by spreading the investment risk across many sectors in the economy

30
Q

what is national income accounting?

A

a system used by governments to measure the level of economic activity in a country

31
Q

what is a closed economy?

A

there is no trade, so the NX in GDP is 0

32
Q

what is the national savings/ investment identity?

A

S=(Y-C-G) note that investment (I) is the save as saving (S)

33
Q

what is national saving?

A

the total income in the economy that remains after paying for consumption and government purchases

34
Q

what does T stand for in the public and private savings equation?

A

taxes collected by the government minus transfer payments

35
Q

what does S=(Y-T-C) + (T-G) represent?

A

the formula/ identity to find national savings

36
Q

if T-G is more than 0 what does that mean?

A

there is a budget surplus for the government

37
Q

if T-G is less that 0 what does that mean?

A

there is a budget deficit for the government

38
Q

what is private savings?

A

income households have left after paying taxes and consumption

39
Q

what is the formula/ identity for private savings?

A

S priv= Y-T-C

40
Q

what is public savings?

A

tax revenue that the government has left after paying its expenditures

41
Q

what is the formula/ identity for public savings?

A

S public= T-G

42
Q

what is the market for loanable funds?

A

the market that all various households, firms and governments use to borrow and lend money

43
Q

what is the model of the market for loanable funds used to understand?

A

the supply and demand for credit (loanable funds) and the influence that interest rates have on the market and the economy

44
Q

what can the model of the market for loanable funds help analyze?

A

the various government policies that can influence saving and investment rate of a country and how they are impacting the economy

45
Q

what is the role of saving in the market for loanable funds?

A

saving is the source of supply of loanable funds

46
Q

what is the role of investment in the market for loanable funds?

A

investment is the source of demand for loanable funds (both investment and consumption can be the source of demand for loanable funds)

47
Q

what is the role of interest rate in the market for loanable funds?

A

interest rate is the price of loanable funds

48
Q

what determines the interest rate of loanable funds?

A

intrest rate is determined by supply and demand for loanable funds

49
Q

where does the supply of loanable funds come from?

A

national savings (public + private savings)

50
Q

where does the demand of loanable funds come from?

A

firms and households that want to borrow for the purpose of investment

51
Q

what are the 3 different policies that change the supply or demand of loanable funds?

A

saving incentive policies
investment incentive policies
government budget deficit and surplus policies

52
Q

what are saving incentive policies?

A

policies that incentivize saving so there is a higher supply of loanable funds

53
Q

what are 3 saving incentives that would promote saving?

A

consumption tax (GST)
tax-free saving accounts (TFSA)
registered retirement savings plan (RRSP)

54
Q

if there is higher supply of loanable funds how will that impact the loanable funds market?

A

if there is higher supply of loanable funds the interest rate will fall and will stimulate investing

55
Q

what are investment incentive policies?

A

policies that incentivize investing so there is a higher demand of loanable funds

56
Q

what is an incentive that would promote investment?

A

an investment tax credit that gives an advantage to firms looking to expand by building factories or buying capital equipment

57
Q

if there is a higher demand for loanable funds how will that impact the loanable funds market?

A

the interest rate will increase and investment will be stimulated due to tax credits and saving will be stimulated due to higher interest rates

58
Q

when the government spends more than they are receiving in taxes what is that called?

A

government budget deficit or government debt

59
Q

when the government receive more in taxes than they spend what is that called?

A

government budget surplus or excess

60
Q

when the government spends the same amount as they receive in taxes what is this called?

A

the government budget is balanced

61
Q

when government debt compounds over time and is constantly operating with a budget deficit and needs to borrow to make up the difference what will that cause?

A

the crowding out effect

62
Q

what is the crowding out effect?

A

when there is a decrease in supply of loanable funds due to the government needing them so firms cannot borrow to grow, ultimately leading to a decrease in investment

63
Q

what is the vicious cycle of falling GDP?

A

government budget deficits can lead to lower or negative economic growth due to less loanable funds, this leads to lower employment, this leads to an increase in government spending from unemployment insurance and less income tax revenue, this leads to the beginning to the cycle

64
Q

is Australia has implemented a national sales tax, which will be used to reduce the countries income tax. what will happen to the loanable funds market?

A

this will cause more disposable income for consuming and saving leading to higher supply of loanable funds

65
Q

after lockdowns caused by the pandemic and multiple countries just opened up, what will happen to the loanable funds market?

A

after a recession in the economy many businesses will want to expand once lock downs are lifted, leading to a higher demand of loanable funds

macroeconomics (13 decks)

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