6. Saving, Investment and the Financial System Flashcards

1
Q

What is the financial system

A

it consists of the group of institutions in the economy that help to match one person’s savings with another person’s investment

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2
Q

what does the financial system acheive

A

it moves the economy’s scarce resources from SAVERS to BORROWERS

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3
Q

Two categories of financial institutions + examples of each

A

Financial markets: share market and the bond market.

Financial intermediaries: banks, managed funds.

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4
Q

how do bonds work?

A

consumers give money to businesses and at the end of the bond term they pay them back - interest is paid on it.

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5
Q

what is the term when you sell shares to raise money?

A

equity financing, the share purchaser own a part of the company

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6
Q

what is the term when you trade bonds?

A

debt financing, you just lend money

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7
Q

what are junk bonds?

A

bonds offered by start-up companies that usually disappear after short amount of time

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8
Q

what is the credit risk of a bond?

A

The probability that the borrower will fail to pay some of the interest or principal

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9
Q

which of bonds and shares have higher risk and higher returns?

A

Shares offer the higher risk (when a company goes bankrupt, the bank claims first, then the bond holders then shareholders)

they also offer the largest potential return (% of profit)

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10
Q

Why are financial intermediaries important? (one reason covered)

A

small businesses like grocers can only raise money by borrowing from a bank. Only large companies can use bonds/shares

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11
Q

What is a medium of exchange provided by the bank?

A

Cheques. They are items that people can easily use to engage in transactions.

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12
Q

stores and bonds are __________ just like a bank

A

stores of value for people

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13
Q

alternative name for managed funds?

A

mutual fund

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14
Q

How do managed funds work?

A

Managed funds sells shares to the public and then use the proceeds to buy a portfolio of various types of stocks and bonds or both. They charge commission.

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15
Q

how do financial systems help

A

they facilitate long term economic growth, increasing GDP and increasing the quality of life for all

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16
Q

in a closed market, what is the relationship between savings and investments?

A

savings = investments

17
Q

what is a closed market?

A

a market with no imports or exports

18
Q

what are loanable funds?

A

all income people have chosen to save and lend out as opposed to using it for consumption

19
Q

term deposit

A

depositing money and being paid interest regularly

20
Q

where does demand for loanable funds come from?

A

households ands firms that wish to borrow money by selling financial assests

21
Q

what is the price of a loan

A

interest on the loan

22
Q

what determines the real interest rate?

A

the equilibrium of supply and demand for loanable funds

23
Q

calculate real interest rate from nominal

A

nominal interest rate - inflation rate

24
Q

how can the government affect the loanable fund market?

A

taxes and saving (incentives to save)

taxes and investment

government budget deficits

25
Q

how can the government reduce incentive to save

A

by taxing interest

26
Q

how will reducing tax on savings interest affect the supply demand curve for loanable funds?

A

Shifts supply curve to the right meaning lower interest rate for same amount of loanable funds(y axis is interest rate, x axis is loanable funds)

27
Q

What does an investment tax credit do?

A

Increases demand for loanable funds, shifts demand curve to the right, results in higher interest rate and greater quantity saved

28
Q

What is a budget deficit?

A

When a government spends more than it receives in tax (not necessarily a bad thing) This is called government debt

29
Q

How does government budget deficit affect the loanable fund market and what is this known as?

A

It reduces the supply of loanable funds as they borrow the supply, it is known as crowding out (the deficit borrowing crowds out private borrowers)

30
Q

How does government budget deficit affect interest rate and investment?

A

supply of loanable funds decreases so interest rate increases and investment decreases as supply shifts left

31
Q

definition of national saving and equation

A

National saving is the total disposable income in the economy after paying for government purchases and consumption

S = YD - C - G

where YD is gross national disposable income

32
Q

definition of private saving and equation

A

Private saving is the amount of disposable income that households have left after paying taxes and consumption

= YD - T - C

33
Q

definition of public saving and equation

A

The amount of tax revenue that the government has left after paying for its spending

= T - G

34
Q

What is gross national disposable income?

A

GDP + NFI, where NFI is the net factor income