Unit 4 Flashcards
(27 cards)
If the stock market crashed does it affect the economy??
No a crash in the stock market will only have effects on people who chose to invest in the market. Not the whole economy.
Income
A flow of compensation per unit of time
- always has a time attached to it to give it meaning
Saving
The amount of income not spent
- no time needed to be attached to
Wealth
A stock variable at a given point in time.
Equal to financial assets minus financial liabilities.
MONEY
A stock variable equal to financial assets
used for transactions.
Investment
The purchase of new capital goods
Difference between psysical capital and a financial investment
Physical capital= tangible items
Financial investment = stock (change of owners)
What is the source of funds for investments
Saving
3 types of financial markets
- loan markets
- Bond markets (lend or borrow to purchase a bond - can sell your share on a. Secondary market before you maturity date)
- stock markets
-> these are all examples of markets for loanable funds
Financial institutions
is a firm that operates on both
sides of the markets for financial capital.
It is a borrower in one market and a lender in another.
Key financial institutions are:
Investment banks
Commercial banks
Government-sponsored mortgage lenders
Pension funds
Insurance companies
Net Worth - solvent and insolvent
A financial institution’s net worth is the total market value of what it has lent minus the market value of what it has borrowed.
- If net worth is positive, the institution is solvent and can remain in business.
- But if net worth is negative, the institution is insolvent and
go out of business.
What to do if your net worth is negative and institutions is insolvent
Your company should get out of business BUT government can help them out: they use tax $$ to helped ue to these business es being deeply rooted into the market
Funds that finance investments
- Household saving
- Government budget surplus
- Borrowing from the rest of the world
The market for loanable funds
is the market in which households, firms, governments, and financial institutions
borrow and lend.
The quantity of loanable funds demanded depends on
- The real interest rate (-) - want low interest rate
- Expected profit (+) - high profit
- Disposable incomes (+)
- Expected future income (-)
- Wealth (-) -> less saving today bcs you already feel wealthy
- Default risks (-)
Effects of changes on the demand curve of loanable funds
Change in r: moving along the curve
- a RISE in the real interest rate decreases investment and the quantity of loanable funds demanded
- a FALL in the real interest rate increases investment and the quantity of loanable funds demanded
Change in expected profit: shifting the curve
What does a rise or fall in real interest rate effect
- a rise in the real interest rate increases saving and the quantity of loanable funds
- a fall in the real interest rate decreasing saving and the quantity of loanable fund supplied
Equilibrium in the loanable funds markets
the real interest rate at which the quantity of loanable
funds demanded equals the quantity of loanable funds
supplied.
Surplus, shortage and equilibrium in funds
Surplus: the real interest rate falls
Shortage: real interest rate rises
Equilibrium
Financial market volatility
Changes in demand or supply in the market for loanable
funds cause volatility in the financial market.
Volatility will lead to fluctuations in
• r
• the quantity of loans
• asset prices
What happens when there is an increase in demand for loanable funds
It will raise the real interest rate and increase saving
What happens when there is an increase of the supply of loanable funds
It lowers the real interest rate and increases investment
The effect of a government budget surplus
Supply of funds increases.
The real interest rate falls.
Investment increases.
