Ch. 8 - Saving, Investment, + the Financial System Flashcards
Financial Systems are…
groups that match savings and investments b/w ppl
Financial Markets are…
savers directly providing funds to borrowers (eg. Stock/Bond markets)
Financial Intermediaries are…
savers directly providing funds to borrowers (eg. banks, mutual funds)
Mutual Funds are…
shares sold to the public to allow purchase of stocks and bonds
GDP is…
formula…
total income + expenditure
y = c + i + g + nx
GDP in a closed economy is… (formula)
y = c + i + g
3 types of savings are…
- Private
- Public
- National
Private Saving is…
household income not consumed or taxed
Y-T-C
Public Saving is…
tax revenue minus gov’t spending
T-G
National Saving is…
private plus public savings
(Y - T - C) + (T - G)
-income not consumed or spent by gov’t (Y - C - G)
Budget Surplus is
excess revenue after gov’t spending
Budget Deficit is…
shortfall of tax revenue after gov’t spending
investment is the purchase of stocks + bonds (t/f)
f
investment is the purchase of new capital (t/f)
t
Budget Deficits cause… (4)
- Gov’t Debt
- Crowding Out
- Vicious Circle
- Virtuous Circle
Gov’t Debt is
sum of all past deficits and surpluses by gov’t.
“Crowding Out” is…
decr in investment resulting from gov’t borrowing
Budget Deficits reduce growth rate (t/f) why?
-true b/c crowding out causes less investment which is key to L-T growth
Vicious Circle is…
where deficits reduce supply of loanable funds, increase interest rates, + discourage investment.
Circle of Viciousness is…
slow econ growth - lower tax revenue - higher spending on income support - higher budget deficits
Virtuous Circle is…
a surplus which increases supply of loanable funds, reduces interest rates + stimulates investment
Virtuous Circle looks like…
econ growing - higher tax revenue - less income support - higher budget surpluses
t/f - using private sector’s savings to finance budget deficits decreases ability to invest in new capital
true
t/f - national saving is not the key to L-T economic growth
false - it is
Saving Incentives Cause…
increase in supply of loanable funds, reduces the eq’m interest rates and increases eq’m quantity of loanable funds
Investment Incentives Cause…
tax credit which increases demand for loanable funds. raises eq’m interest rates + increases eq’m quantity for loanable funds
Gov’t Budget Deficits cause…
reduction in national saving + loanable funds supply. Increases eq’m interest rates + decreases eq’m quantity of loanable funds
