Ch. 14- The Basics of Finance

Question 1

Information Asymmetry

Answer 1

When one person knows more about a transaction than the other

Question 2

Market for Loanable Funds

Answer 2

Savers are suppliers of loanable funds and borrowers are the demand of loanable funds.

Question 3

National Saving

Answer 3

Total income in the economy that remains after paying for consumption and government purchases.

Question 4

Private Saving

Answer 4

Income households have left after paying for taxes and consumption

Question 5

Public Saving

Answer 5

Tax revenue that the government has left after paying for its spending

Question 6

Determinants of Saving

Answer 6

>Current Economic Conditions
>Expectations about Future Economic Conditions
>Social Welfare Policies
>Culture
>Uncertainty
>Wealth
>Borrowing Constraints

Question 7

Determinants of Investment

Answer 7

Expectations about Future Profitability
Uncertainty
Changes in government’s budget deficit/surplus

Question 8

Equilibrium in market of loanable funds

Answer 8

National Savings = Investment

Determines interest rate and quantity of money

Question 9

Functions of the Financial System

Answer 9

Intermediary
Provides Liquidity
Diversifies Risk

Question 10

Efficient Market Hypothesis

Answer 10

Market prices always incorporate all available information, and therefore represent stock value as correctly as possible.