Chapter 8

Question 1

Through Bastiat’s essay on thrift and luxury,

Answer 1

Bastiat believes that thrift is greater than luxury, because saving will never run out, while spending luxurious amounts of money will.

Question 2

The true suppliers of loans are

Answer 2

consumers and business that save.

Question 3

What do savers pay for?

Answer 3

delaying consumption.

Question 4

The price savers pay for delaying consumption is

Answer 4

the interest rate.

Question 5

With direct finance

Answer 5

a borrower deals directly with the lender.

Question 6

The date that a payment will be made is

Answer 6

maturity.

Question 7

The value paid at maturity is the

Answer 7

face value.

Question 8

Bonds with no interest rates are called

Answer 8

zero coupon bonds.

Question 9

Interest rates quoted on bonds are called

Answer 9

the coupon rate.

Question 10

When middlemen are used for lending and borrowing, such as banks, this is called

Answer 10

indirect finance.

Question 11

Middlemen in indirect finance are paid because

Answer 11

they add value to the consumer.

Question 12

FInancial intermediates such as banks,

Answer 12

spread the risk of non-payment, develop advantages in credit evaluation and collection, divide denominations of loans, and match time preferences.

Question 13

The interest rate is

Answer 13

the savers reward for waiting to consume, and the borrower’s cost of consuming or investing early.

Question 14

Higher interest rates

Answer 14

encourage more saving, but discourages borrowing because a higher interest rate means they will have to pay back more.

Question 15

As with any supply and demand,

Answer 15

borrowers would prefer lower rates and lenders would prefer higher rates.

Question 16

What does usury law do?

Answer 16

It puts a price ceiling on interest rates, potentially causing a shortage if the ceiling was below the equilibrium point.

Question 17

If the public decides to save more,

Answer 17

the supply of loanable funds increases, lowering interest rates and encouraging investment.

Question 18

An increase in investment caused by an increase in money is only sustainable

Answer 18

by more money being created, creating a bubble.

Question 19

When an increase in government spending is financed through borrowing,

Answer 19

this is indirect crowding out

Question 20

When the government spends, private markets spend less because their ability to spend is taxed away–

Answer 20

this is called direct crowding out.

Question 21

A leveraged buyout is when

Answer 21

a firm borrows to purchase another firm, then turning around to sell that firm.

Question 22

When firms can not pay their obligations nor borrow money to pay, they can

Answer 22

declare bankruptcy

Question 23

A firm whose value is negative–owes more than it owns–

Answer 23

is insolvent.

Question 24

A solvent firm might be forced to declare bankruptcy when it cannot pay back its immediate obligations and become

Answer 24

illiquid

Question 25

A major contribution of bankruptcy to economic health is

Answer 25

to move resources to more productive users, creating value.

Question 26

If a firm becomes bankrupt, it pays its debts according to

Answer 26

the absolute priority rule-- the oldest debts get paid first

Question 27

Fannie Mae was created in the sixties to

Answer 27

buy safe home loans that banks had made

Question 28

Freddie Mac was created to

Answer 28

compete with Fannie Mae.

Question 29

The Community Reinvestment Act was created to

Answer 29

make banks give loans to poor people who couldn't get home loans before because they couldn't pay