CH10: Saving, investment and the financial system

Question 1

Examples of financial markets and financial intermediaries?

Answer 1

FM = institutions through which savers directly provide funds to borrowers.

• Share market
• Bond market

FI = financial institutions where savers indirectly provide funds to borrowers.

• Banks
• Managed funds

Question 2

Formula for GDP / Y

Answer 2

Y = C + I + G + NX

GDP is the same.

Question 3

Formula for GNDI?

Answer 3

YD = Y + NFI

Question 4

Savings in an open / closed economy?

Answer 4

S = I + (NX + NFI)
S = I

Question 5

Define + Formula of Private + Public Savings?

Answer 5

Private = Disposable income for households after paying tax and consumer spending (YD - T - C).

Public = Tax revenue after govt pays for spending ( T - G).

Question 6

3 Policies that affect Market for Loanable Funds?

Answer 6

1) taxes and saving e.g. tax on interest income.
2) taxes and investment e.g. investment tax credit increase.
3) Govt budget deficit. Govt has to borrow from financial institutions. Supply of loanable funds falls. Public saving decreases so demand stays the same, but as a result, ROI increases therefore less people borrow to buy houses / firms invest in factories.

Question 7

Define “crowding out”

Answer 7

Govt deficit causes them to take more loanable funds from banks, therefore less loanable funds for private investment.