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Flashcards in Chapter 8 Deck (29):
1

Through Bastiat's essay on thrift and luxury,

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

2

The true suppliers of loans are

consumers and business that save.

3

What do savers pay for?

delaying consumption.

4

The price savers pay for delaying consumption is

the interest rate.

5

With direct finance

a borrower deals directly with the lender.

6

The date that a payment will be made is

maturity.

7

The value paid at maturity is the

face value.

8

Bonds with no interest rates are called

zero coupon bonds.

9

Interest rates quoted on bonds are called

the coupon rate.

10

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

indirect finance.

11

Middlemen in indirect finance are paid because

they add value to the consumer.

12

FInancial intermediates such as banks,

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

13

The interest rate is

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

14

Higher interest rates

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

15

As with any supply and demand,

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

16

What does usury law do?

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

17

If the public decides to save more,

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

18

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

by more money being created, creating a bubble.

19

When an increase in government spending is financed through borrowing,

this is indirect crowding out

20

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

this is called direct crowding out.

21

A leveraged buyout is when

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

22

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

declare bankruptcy

23

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

is insolvent.

24

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

illiquid

25

A major contribution of bankruptcy to economic health is

to move resources to more productive users, creating value.

26

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

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

27

Fannie Mae was created in the sixties to

buy safe home loans that banks had made

28

Freddie Mac was created to

compete with Fannie Mae.

29

The Community Reinvestment Act was created to

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