Ch. 8 - Saving, Investment, + the Financial System

Question 1

Financial Systems are…

Answer 1

groups that match savings and investments b/w ppl

Question 2

Financial Markets are…

Answer 2

savers directly providing funds to borrowers (eg. Stock/Bond markets)

Question 3

Financial Intermediaries are…

Answer 3

savers directly providing funds to borrowers (eg. banks, mutual funds)

Question 4

Mutual Funds are…

Answer 4

shares sold to the public to allow purchase of stocks and bonds

Question 5

GDP is…

formula…

Answer 5

total income + expenditure

y = c + i + g + nx

Question 6

GDP in a closed economy is… (formula)

Answer 6

y = c + i + g

Question 7

3 types of savings are…

Answer 7

1. Private
2. Public
3. National

Question 8

Private Saving is…

Answer 8

household income not consumed or taxed

Y-T-C

Question 9

Public Saving is…

Answer 9

tax revenue minus gov’t spending

T-G

Question 10

National Saving is…

Answer 10

private plus public savings
(Y - T - C) + (T - G)
-income not consumed or spent by gov’t (Y - C - G)

Question 11

Budget Surplus is

Answer 11

excess revenue after gov’t spending

Question 12

Budget Deficit is…

Answer 12

shortfall of tax revenue after gov’t spending

Question 13

investment is the purchase of stocks + bonds (t/f)

Answer 13

f

Question 14

investment is the purchase of new capital (t/f)

Answer 14

t

Question 15

Budget Deficits cause… (4)

Answer 15

1. Gov’t Debt
2. Crowding Out
3. Vicious Circle
4. Virtuous Circle

Question 16

Gov’t Debt is

Answer 16

sum of all past deficits and surpluses by gov’t.

Question 17

“Crowding Out” is…

Answer 17

decr in investment resulting from gov’t borrowing

Question 18

Budget Deficits reduce growth rate (t/f) why?

Answer 18

-true b/c crowding out causes less investment which is key to L-T growth

Question 19

Vicious Circle is…

Answer 19

where deficits reduce supply of loanable funds, increase interest rates, + discourage investment.

Question 20

Circle of Viciousness is…

Answer 20

slow econ growth - lower tax revenue - higher spending on income support - higher budget deficits

Question 21

Virtuous Circle is…

Answer 21

a surplus which increases supply of loanable funds, reduces interest rates + stimulates investment

Question 22

Virtuous Circle looks like…

Answer 22

econ growing - higher tax revenue - less income support - higher budget surpluses

Question 23

t/f - using private sector’s savings to finance budget deficits decreases ability to invest in new capital

Answer 23

true

Question 24

t/f - national saving is not the key to L-T economic growth

Answer 24

false - it is

Question 25

Saving Incentives Cause…

Answer 25

increase in supply of loanable funds, reduces the eq’m interest rates and increases eq’m quantity of loanable funds

Question 26

Investment Incentives Cause…

Answer 26

tax credit which increases demand for loanable funds. raises eq’m interest rates + increases eq’m quantity for loanable funds

Question 27

Gov’t Budget Deficits cause…

Answer 27

reduction in national saving + loanable funds supply. Increases eq’m interest rates + decreases eq’m quantity of loanable funds