Ch 10 Financial Sector: Savings, Investment Spending, and the Financial System

Question 1

Savings =

Answer 1

Income - Expenditure

Question 2

Net Capital Inflow

Answer 2

Net capital inflow of funds into a country minus the total flow of funds out of the country

Question 3

Why save? 3 reasons

Answer 3

1) Life-cycle saving
2) Precautionary saving
3) Bequest saving

Question 4

Life cycle saving

Answer 4

is saving to meet long term objectives such as retirement, college attendance, or the purchase of a home

Question 5

Precautionary Saving

Answer 5

is saving for protection against unexpected setbacks as the loss of a job or medical emergency

Question 6

Bequest Saving

Answer 6

is saving done for the purpose of leaving an inheritance

Question 7

Saving is sacrificing _____________ to obtain __________

Answer 7

1) present consumption
2) future consumption

Question 8

If you are a net borrower a higher interest rate will ___________

Answer 8

decrease your wealth (example: higher mortgage payments). More savings. You wanna save if the interest rate goes up

Question 9

If you are a net lender a higher interest rate will ____________

Answer 9

increase your wealth (greater return on your assets). Since present income hasn’t changed this leads to less savings

Question 10

The higher the interest rate the ___________ the reward for saving. So people will be ______ inclined to save.

Answer 10

1) greater
2) more

Question 11

Supply for loans: if real interest rate goes up, the reward for sacrificing consumption ___________ and people save ______

Answer 11

1) increases
2) more

Question 12

Supply for Loans: For each value of interest, how much do people save?

Answer 12

Interest Rate (y axis) Loanable Funds (x axis)
2% $4B
4% $5B
6% $10B
- the graph of savings goes up
Based on the discussion the graph has a positive slope (savings increasing)

Question 13

Demand for loans (by firms)

Answer 13

The higher interest rate, the less investment is profitable

Question 14

Risk averse

Answer 14

a person who is more sensitive to a loss than to a gain of the same dollar amount

Question 15

diversification

Answer 15

owners achieve diversification by selling a share of her business and investing in several unrelated, independent things so they lower her total risk

Question 16

types of common financial assets

Answer 16

1) loan
2) bonds
3) loan backed securities
4) stocks

Question 17

Loan

Answer 17

a lending agreement between a lender and a borrower
- tailored to the needs of the borrower
- high transaction costs )negotiating terms, investigating credit history of the borrower)

Question 18

Bonds

Answer 18

seller of the bond promises to pay a fixed sum of interest each year and to repay the principal - the value stated on the face of the bond - to the owner of the bind on a particular date.

Question 19

Loan backed securities

Answer 19

assets created by pooling individual loans and selling shares in that pool

Question 20

Loan backed securities

Answer 20

assets created by pooling individual loans and selling shares in that pool

Question 21

stocks

Answer 21

partial ownership of a company

Question 22

savings investment spending identity

Answer 22

savings are always equal to investment spending for the economy as a whole

Question 23

The functions of the Central Bank

Answer 23

o The central bank acts as banker for commercial banks
o The central bank acts as banker for the federal government
o The central bank issues currency
o The central bank conducts monetary policy