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Macro > Test 3 > Flashcards

Test 3 Flashcards

1
Q

Define “Physical Capital”

A

Tools, instruments etc

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2
Q

Define “Financial Capital”

A

Funds that firms use to buy physical capital.

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3
Q

Define Wealth

A

Wealth = value of all things that people own

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4
Q

Define Savings

A

amount of income left after taxes and consumption of goods/services

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5
Q

Funds are supplied and demanded in what 3 types of financial markets?

A
  1. Loan markets
  2. Bond markets
  3. Stock markets
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6
Q

Define “Financial Institutions”

A

firms that operate on both sides of the markets for financial capital. They borrow in one market and lend in another.

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7
Q

What are the 4 key types of financial institutions?

A
  1. Commercial banks
  2. Mortgage companies (building societies)
  3. Pension funds
  4. Insurance companies
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8
Q

How is a financial institution’s net worth calculated?

A

Market value of assets - market value of liabilities.
Insolvency = net worth < 0

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9
Q

What is a Commercial Bank?

A

A private firm, licensed under the Banking Act of 1987, to take deposits and make loans

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10
Q

What are Building Societies?

A

A private firm, licensed under the Building Societies Act 1986, to accept deposits and make loans.

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11
Q

What are 3 features of building societies, compared to commercial banks?

A
  • Deposits are usually saving accounts
  • Loans are usually for house purchases
  • Reserves are kept at commercial banks
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12
Q

What is the market for loanable funds?

A

market in which households, firms, govs, banks etc borrow and lend.
Is the aggregate of all the individual financial markets
Include all forms of credit i.e. loans, savings and bonds

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13
Q

What are the 3 sources of funding for finance investment?

A
  1. Household saving (S)
  2. Government budget surplus (T – G)
  3. Borrowing from rest of world (M-X)
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14
Q

What is the real interest rate in words?

A

The opportunity cost of borrowing

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15
Q

What is the the demand for loanable funds?

A

relationship between quantity of loanable funds demanded and the real interest rate, when all other influences on borrowing plans remains the same.

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16
Q

What is the main component for demand for loanable funds?

A

Business investment

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17
Q

What do the quantity of loanable funds demanded depend on?

A
  1. Real interest rate (movements along)
  2. Expected profit (shifts in demand)
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18
Q

What is the supply of loanable funds?

A

relationship between the quantity of loanable funds supplied and the real interest rate, when all other influences on lending plans remain the same.

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19
Q

What is the main component for supply of loanable funds?

A

Saving

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20
Q

The quantity supplied of loanable funds depend on 5 things?

A
  1. Real interest rate
  2. Disposable income
  3. Expected future income
  4. Wealth
  5. Default risk
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21
Q

What does an increase in demand for loanable funds do in the market?

A

Raises the real interest rate and increases saving

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22
Q

What does an increase in expected profits do for the loanable funds market?

A

increases the demand for funds today. Real interest rate rises. Saving and the quantity of funds supplied increases.

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23
Q

If one of the influences on saving plans changes and saving incomes (disposable income rises), what happens to supply?

A

Supply of funds increases (shift rightward).
Real interest rate falls.
Investment increases.

24
Q

What is the effect of a government budget surplus in the loanable funds market?

A
  • Increases the supply of funds (shift rightwards) as it frees savings to be borrowed by private users.
  • Real interest rates falls, private saving falls, investment rises
25
Q

What is the effect of a government budget deficit on the loanable funds market?

A
  • Increases the demand for funds (rightward shift)
  • Real interest rate rises, private saving increases, investment decreases = CROWDING OUT EFFECT.
    Then, the Ricardo-Barro effect occurs = A budget deficit increases the demand for funds. Rational taxpayers increase saving = increase in supply of funds = increase private saving finances the deficit = CROWDING-OUT AVOIDED.
26
Q

What are the 2 features of loanable funds markets?

A
  1. High volatility
  2. Global in nature
27
Q

Explain what is meant by High Volatility

A
  • Financial markets = highly volatile in short run, long run = quite stable.
  • Volatility = derived from fluctuations in either the demand for loanable funds or the supply of loanable funds
  • These fluctuations bring fluctuations in the real interest rate and in equilibrium quantity of funds lent and borrowed.
  • Also bring fluctuations in asset prices
28
Q

Explain what is meant by the Global Loanable Funds Market

A
  • Loanable funds market = GLOBAL not national.
  • Lenders = want to earn highest possible interest rate + will seek it by looking at world.
  • Borrowers = want to pay the lowest possible interest rate + will seek it by looking at world
  • Financial capital is mobile: funds flow into country in which the real interest rate is highest + out of country in which the real interest rate is lowest.
29
Q

Define the term “Money”

A

Any commodity or token that is generally acceptable as a means of payment

30
Q

Define “Means of payment”

A

Method of settling a debt

31
Q

3 functions of money

A
  • Medium of exchange
  • Unit of account
  • Store of value
32
Q

Explain “Medium of Exchange”

A
  • An object that is generally accepted in exchange for goods/services.
  • In the absence of money = people would need to exchange goods/services directly = BARTERING
  • Bartering = usually needs a double coincidence of wants = rare = hence bartering is costly
33
Q

Explain “Unit of Account”

A
  • An agreed measure for stating the prices of goods/services
34
Q

Explain “Store of Value”

A
  • Money can be held for a time and later exchanged for goods/services
35
Q

What 2 things does money in the UK consist of?

A
  1. Currency (notes/coins held by public)
  2. Deposits at banks and building societies
36
Q

What is the official money measure in the UK?

A

M4 = Consists of currency held by public + bank deposits and building society deposits.
- M4 doesn’t include: notes and coins held by banks and building societies and doesn’t include bank deposits of UK gov

37
Q

What are the 3 components of M4?

A
  1. Currency
  2. Sight Deposits
  3. Time Deposits
38
Q

What is the goal of any bank, and how do they achieve this?

A
  • Goal of any bank is to maximise the wealth of its owners
  • To achieve this = interest rate at which it lends exceeds the interest rate it pays on deposits
  • Loans generate profit. But the banks must balance profit and prudence
  • Depositors must be able to obtain their funds when they want them
39
Q

4 types of assets that commercial banks put depositors funds into?

A
  1. RESERVES = Notes and coins in its vault or its deposit at the Bank of England
  2. LIQUID ASSETS = UK gov. treasury bills and commercial bills.
  3. SECURITIES = Longer-term UK gov bonds and other bonds i.e. mortgage-backed securities
  4. LOANS = Commitments of fixed-amount of money for agreed-upon periods of time.
40
Q

Define Monetary Policy

A

Attempt to control inflation and moderate the business cycle and provide the foundation for sustained economic growth by influencing the quantity of money, interest rates and the exchange rate.

41
Q

What 3 things does the Central Bank do?

A
  • Is the public authority that:
    1. Provides banking services to govs and commercial banks
    2. Regulates financial institutions and markets
    3. Conducts monetary policy
42
Q

explain the bank of England

A
  • UK central bank
  • Established in 1694
  • Nationalised in 1946
  • In 1997 = bank was given independence to conduct monetary policy, subject to objectives determined by the gov
43
Q

explain the Fed

A

The Federal Reserve System (Fed)
- Bank of the U.S
- Founded in 1913

44
Q

explain the ECB

A

The European Central Bank (ECB)
- Central bank of the Eurozone
- Formed in 1998

45
Q

Define Fiscal Policy

A

Altering the levels of taxation and gov spending to influence the AD and the economy

46
Q

Define gov budget

A

An annual statement of projected outlays and receipts during the next year, together with the laws and regs that support those outlays and revenues.

47
Q

Receipts come from what 5 sources?

A
  1. Taxes on income and wealth
  2. Taxes of business
  3. Taxes on expenditure
  4. National insurance contributions
  5. Other receipts and royalties
48
Q

Outlays are classified into what 3 categories?

A
  1. Expenditures on goods/services
  2. Transfer payments
  3. Debt interest
49
Q

Explain the 3 situations of budget and gov

A
  • If receipts exceed outlays = BUDGET SURPLUS
  • If outlays > receipts = BUDGET DEFICIT
  • If receipts = outlays = BALANCED BUDGET
50
Q

explain the gov budget in historical perspective

A
  • Gov budget = mainly been in deficit since 1990/91
51
Q

Define gov debt

A

total amount borrowed by the gov.

52
Q

A budget deficit, or purchase of assets, does what to gov debt?

A

Increases it

53
Q

A budget surplus, or sale of assets, does what to gov debt?

A

Decreases it

54
Q

Explain the impact of covid on deficit and debt

A
  • Sunak says the budget deficit will be £355bn in 2021, or 17% of GDP – the highest level in peacetime.
  • He says that without corrective action, borrowing would continue at very high levels, leaving underlying debt rising indefinitely.
  • Because of the actions he is taking, he says borrowing will fall to 4.5% of GDP in 2022-23, then to 3.5% in 2023-24, then 2.9 and 2.8% in the following two years.
  • The national debt – the sum total of every budget deficit – will rise from 88.8% of GDP this year to 93.8% next year, it will peak at 97.1% in 2023-24, before stabilising and falling slightly to 97% and 96.8% in the final two years of the forecast.
  • In November, the OBR estimated a budget deficit – the gap between spending and receipts – of £394bn for 2020-21.
  • The chancellor says this matters because the amount borrowed is only comparable to the two world wars
55
Q

Define debt

A

Amount of money owed by the UK gov. Has been built up over many years by many govs

56
Q

Explain EU gov budget balances and debts

A
  • EU receives 85% of its receipts from the member states and 15% from EU tariffs on imports from non-member countries.
  • The total EU budget in 2017 was €157.9 billion, €148 billion (2019 figure)– equivalent to just over 1 per cent of EU GDP.
  • This is a tiny fraction (2%) of the combined national budgets of all 28 EU countries in 2019
  • Unlike national budgets, which are mainly used to provide public services and fund social security systems, the EU budget is primarily used for investment
  • Natural resources management – support for the Common Agricultural Policy (CAP) and the environment – take the largest slice at 39 per cent of total EU outlays.
  • Reducing regional disparities – grants to weaker economic regions and expenditure on measures to improve competitiveness – take the largest slice at 37 per cent of total EU outlays
57
Q

Explain the argument for the EU budget

A
  • EU budget is:
    1. Hotly debated
    2. Contributes to economic life in many EU countries
  • Fiscal policy (revenue and outlays) stay with the member states.
  • Nothing bad about gov running a deficit as long as the resources are being used to add to the stock of social capital. Is also case for a temporary gov deficit to try and lift an economy from recession

Macro (4 decks)

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