Week 3 Flashcards

(61 cards)

1
Q

transaction costs

A

expenses of negotiating and executing a deal

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2
Q

savings-investment spending identity

A

savings and investment spending are always equal for economy as a whole

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3
Q

budget surplus

A

excess of tax revenue over government spending

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4
Q

budget deficit

A

excess of government spending over tax revenue

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5
Q

budget balance

A

difference between tax revenue and government spending

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6
Q

national savings

A

sum of private savings and budge balance

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7
Q

budget balance

A

total amount of savings generated within an economy

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8
Q

financial capital

A

funds from savings available for investment spending

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9
Q

net capital inflow

A

total flow of funds into a country minus total flow of funds out of a country

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10
Q

What does a country with a positive net capital inflow have?

A

extra flow of funds from abroad that can be used for investment spending

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11
Q

net capital inflow equation

A

net capital inflow = imports - exports

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12
Q

investment spending equation

A

investment spending = national savings + net capital inflow

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13
Q

financial market

A
  • bring savers and borrowers brough together
  • channels savings of households to businesses that want to borrow in order to purchase capital equipment
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14
Q

loanable funds market

A
  • hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders
  • assume price of loans = nominal IR
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15
Q

interest rate

A

price of borrowing funds

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16
Q

Why is the demand for loanable funds downward sloping?

A

firms borrow more when interest rate decreases because more projects will earn enough to pay for themselves

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17
Q

when is an investment worth making?

A

if it generates future return that is greater than the monetary cost of making the investment today

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18
Q

present value

A

amount of money needed today to receive a given amount of money at a future date given the interest rate

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19
Q

present value equation

A

Y = X(1+IR)

  • X = present value
  • Y = money to receive
  • IR = interest rate
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20
Q

graph for loanable funds

A
  • A: only projects that are profitable at an interest rate of X% or more are funded
  • B: offers not accepted from lenders who demand interest rate of more than X%
  • C: offers accepted from lenders willing to lend at interest rates of X% or less
  • D: offers accepted from lenders willing to lend at interest rate of X% or less
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21
Q

why is the supply for loanable funds upward sloping?

A

more people are willing to forgo current consumption and make a loan to a borrower when IR is higher

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22
Q
A
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23
Q

factors causing a shift in demand for loanable funds curve

A
  • changes in perceived business opportunities
  • changes in government borrowing
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24
Q

crowding out

A
  • potential side effect of government borrowing
  • occurs when a government budget deficit drives up the interest rate and leads to reduced investment spending
  • not a concern for depressed economy, increase in government spending increases income and private savings
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25
factors causing a shift in supply for loanable funds curve
* changes in private savings behaviour * changes in net capital inflows
26
any shifts in S and D for loanable funds causes?
change in interest rates
27
factors causing a change in interest rates
* changes in government policy * technological innovation that lead to new investment opportunities * expectations of future inflation
28
real interest rate equation
real interest rate = nominal interest rate - inflation rate
29
what do loan contracts specifiy in terms of interest rate?
because no one can predict the inflation rate, loan contracts give nominal interest rate
30
Fisher effect
increase in expected future inflation increases nominal interest rate leaving the expected real interest rate unchanged
31
Fisher effect graph
32
wealth
value of a household's accumulated savings
33
financial asset
paper claim that entitles buyer to future income from seller
34
physical asset
tangible object that can be used to generate future income
35
liability
requirement to pay income in the future
36
why is a well-functioning financial system important in achieving long run growth?
* encourages greater savings and investment spending * ensures that savings and investment spending undertaken efficiently
37
what are the 3 tasks of a financial system?
1. reduce transaction costs 2. reduce risk 3. provide liquidity
38
financial risk
uncertainty about future outcomes that involve financial losses or gains
39
diversification
investing in several assets with unrelated risks, reduces risk
40
liquidity
measure of how quickly an asset can be converted into cash with relatively little loss of value
41
bond
* IOU issued by borrower * usually with a set interest rate and maturity date * risker bonds have higher interest rate
42
default
* concern for investors * failure of borrower to make payments
43
loan-backed securities
assets created by pooling individual loans and selling shares in that pool
44
securitisation
process of pooling individual loans and selling shares in that pool
45
stock
share in the ownership of a company
46
financial intermediary
* institution that transforms the funds it gathers from many individuals into financial assets * e.g. mutual funds, pension funds, life insurance, companies, banks
47
mutual fund
financial intermediary which builds stock portfolio and resells shares of this portfolio to individual investors
48
pension fund
type of mutual fund that holds assets to provide retirement income to members
49
life insurance company
sells policies that guarantee a payment to a policyholder's beneficiaries when a policyholder dies
50
51
bank
financial intermediary that provides liquid assets in form of bank deposits to lenders and uses those funds to finance illiquid investment spending needs of borrowers who don't want to use the stock or bond markets
52
bank deposit
financial asset owned by depositor and a liability of the bank that holds it
53
what causes asset price fluctuations?
* demand for stocks * demand for other stocks * asset price expectations
54
efficient markets hypothesis
asset prices embody all publicly available information
55
implications of the efficient markets hypothesis?
* at any time stock prices are fairly valued * price of stocks, etc. should only change in response to new information about underlying fundamentals * price should move in 'random walk'
56
'random walk'
movement over time of unpredictable variable
57
behavioural economics
study of how people make predictable mistakes in their decisions
58
examples of irrational phenomena
* overconfidence * loss aversion * herd mentality
59
overconfidence
misguided faith that they can spot winning stock
60
loss aversion
unwilling to sell unprofitable asset and accept loss
61
herd mentality
buying asset when its price has already been driven high and selling when already driven low