Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Econ 102 > chapter 10 > Flashcards

chapter 10 Flashcards

1
Q

define

Investment-savings relationship

in closed economy, no gov

A

savings = investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

define

Investment-savings relationship

in closed economy with gov

A

national savings = private + public savings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

define

Private and Public Savings

equations

A

Pvt = Y - (T - TR) - C
Pub = revenue - expenditure, (T - TR) - G

T - TR is net tax revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

define

investment-savings relationship

open economy

A

national savings = I + NX

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

something

Net Foriegn Investment

A

NFI = outflow of funds - inflow of funds
Sntl - I = NFI
X - M

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

define

Outflow

NFI

A

Investment in foreign firms causing funds to leave the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

define

Inflow

NFI

A

foreigners can buy goods and services, causing funds to enter the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

relationship between I, Sntl, and NFi

A

NFI = Sntl - I
I = Sntl - NFI
Sntl = I + NFi

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

define

What does it mean if NFI is negative or positive?

A

Negative: more funds flowing out
Positive: more funds flowing in

positive NX -> pos NFI, vice versa

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is demand and supply in the loanable funds market?

A

S: quantity of funds, primarily from households
D: demand for borrowing funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

x and y axis of loanable funds mkt

A

x: quantity of loanable funds
y: interest rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

opportunity costs in the loanable funds mkt

A
  • investment is based on own savings
  • investments are based 100% on borrowing: firm will have to pay it back, the amount is dependent on interest rate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

firms will borrow when

A

the expected return from the project > amount they’ll pay back
equation: A (1+i) = B

A = present value/investment amount,
B = amount to be paid back

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

define

present value calculation

A

A = B / (1 + i)
or
X = (expected return/(1+i)^t) - initial cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

how to find out the max amount a firm should borrow?

A

look at the expected return based on interest rate
expected return/(1+i) = max amount willing to borrow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

list

Supply side of loanable funds mkt

A

based on:
- household decisions to save
- gov saving
- as interest rate increases, households save more

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

discuss

eqm of loanable funds mkt

A

investment = savings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

discuss

excess supply of funds in the loanable funds mkt

A

downward pressure is put on the interest rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

discuss

excess demand in loanable funds mkt

A

firms compete for borrowing, leading to a higher interest rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

list

causes of shifts in the demand curve (loanable funds)

A
  1. changes in perceived business profitability and/or opportunities
  2. changes in government policy that affects investment decisions
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

discuss

changes in percieved profitability

A
  • increased demand for borrowing: shift D right
  • can also cause D to shift left (ex. noticing that businesses are failing)
  • triggered by changes in technoogy and resources
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

dicuss

changes in gov policy

A
  • tax credit: whichever firms invest will get to pay less taxes
  • investment subsidies
    both cause demand to shift right
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

discuss

What happens when demand shifts right?

A
  • rise in eqm interest rate
  • increase in demand for funds
  • quantity saved increases
24
Q

discuss

causes of shifts in supply curve (loanable funds)

A

changes in private saving behavior
- based on predicted future -> change in output, savings inc, supply curve shifts right
- hopeful about future, cut savings, supply curve shifts left
Changes in gov budget balance
- budget surplus: Spub is positive, more investment
- budget deficit: Spub is negative, reduction of savings, reduce loanable funds (left)

25
Q

discuss

What happens when supply shifts right or left? (loanable funds)

A

right: interest rate dec, quanitity supplied inc
left: rise in eqm interest rate, quantitiy dec

26
Q

define

Budget Balance

A

revenue - expenditure
(Tax - TR) - G

27
Q

discuss

(T - TR) - G = 0…

A

T - TR = G
budget is balanced, and no public savings are present

28
Q

discuss

(T - TR) - G > 0…

A

budget surplus
Spub > 0

29
Q

discuss

(T - TR) - G < 0…

A

budget deficit
government is spending more than is earned from taxes
Spub < 0

30
Q

discuss

Global Market for Loanable Funds

A

factors: interest rate differential (local v global), risk status, exchange rate, etc.
high interest rate in world mkt causes outflow, low world interest rate causes inflow from abroad

31
Q

discuss

risks in global market

A

volatile political environment
currency values

32
Q

discuss

Capital Flows

A
  • countries with low interest rates have capital flow into those with higher interest rates
  • lenders intrested in higher interest rate -> creates competition
  • borrowers interested in lower interest rate -> competition
  • raises interest rate in lower country, reduces it in higher interest rate country
  • high interest rate country will have excess demand
  • low interest rate country will have excess supply
33
Q

discuss

what a bond is

A

a bond is issued by the government and firms to borrow money from the economy

34
Q

define

face value

bonds

A

amount being borrowed and the price of a bond when issued

35
Q

define

years of maturity

bonds

A

when you’ll get back the money from the bond (can be short or long term)

36
Q

define

coupon value

A

fixed coupon allowing you to get fixed cash back after each year

37
Q

define

bond yield

A

return expected after each year until maturity (?)

38
Q

Where can you sell bonds?

A

bonds market!

39
Q

relationship between price of a bond and the nominal interest rate is…

A

inverse!
- if nominal interest rate rises, bond price falls
- if nominal interest rate rises, bond price rises

40
Q

discuss

fisher effect and loanable funds mkt

A

eqm in loanable funds mky corresponds o expected inflation, a change in expected inflation shifts both demand and supply equally and simultaneously. This leads to a new nominal interest rate in the loanable funds market, the eqm quantity does not change
what really matters is real interest rate, it tells us what happens to purchasing power
real interest rate = nominal interest rate - inflation rate

41
Q

discuss

significance of fisher effect

A

our expectation of inflation shifts with the economy, and unions base wage negotiations on expected inflation

basically both demand and supply shift upward

42
Q

Savings-Investment Spending Identity

A

savings = investment spending

43
Q

Snational =

closed economy

A

GDP - C - G

44
Q

TR

what does it represent

A

TRANSFERS

45
Q

Sprivate =

A

(GDP - T + TR) - C

46
Q

define

Present Value

A

the amount of money needed today in order to receive X at a future date, given the interest rate

47
Q

if interest rate falls…

loanable funds

A

present value rises, more projects have a greater future payoff

48
Q

if interest rate rises…

loanable funds

A

present value falls, less projects have greater future payoff = less investment

49
Q

define

crowding out

A

the negative effect of budget deficits on private investment - gov brrowing drives up interest rate

50
Q

define

Fisher Effect

A

the expected real interest rate is unaffected by changes in expected future inflation

51
Q

How to calculate Present Value of One-Year Projects

A

X x (1 + r) = amount recieved
X = amount recieved/(1 + r)

where X is amount lended

52
Q

How to calculate the Present Value of Multiyear Projects

A

Xnyrs x (1 + r)^n = amount recieved
Xnyrs = amount recieved/(1 + r)^n

53
Q

How to calculate Present Value of Projects with Revenues and Costs

A

X = (revenue/(1 + r)^n) - initial cost

54
Q

How to Calculate thr Price of a Bond Using Present Value

A

Bond Price = C/(1 + i) + C/(1 + i)^2 + … + C/(1 + i)^(n - 1) + C/(1 + i)^n + F(1 + i)^n

where
C = coupon
i = interest rate
n = number of years
F = face value

55
Q

Investment Spending =

closed economy

A

GDP - C - G

56
Q
A
57
Q

Net Capital Inflow

A

inflow - outflow
M - X

Econ 102 (5 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions