Chapter 10 Flashcards

1
Q

Savings-investment spending identity

A

Savings and investment spending are always equal for the economy as a whole

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2
Q

Budget surplus

A

The difference between tax revenue and government spending when tax revenue exceeds government spending

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3
Q

Budget deficit

A

The difference between tax revenue and government spending when government spending exceeds tax revenue

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4
Q

Budget balance

A

The difference between tax revenue and government spending

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5
Q

National savings

A

The sum of private savings and the budget balance, is the total amount of savings generated within the economy

Savings (national) = savings (government) + savings (private)

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6
Q

“investment spending”

A

spendingon new physical capital

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7
Q

“making an investment”

A

The act of purchasing an asset such as a share of stock, a bond, or existing real estate

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8
Q

net capital inflow

A

The total inflow of funds into a country minus the total outflow of funds out of a country

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9
Q

national cost

A

the interest that must eventually be paid to a foreigner

dollar ofinvestment spending financed by a capital inflow > dollar investment spending financed by national savings

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10
Q

Net capital inflow formula

A

Net capital inflow = imports - exports

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11
Q

Investment spending formula (with capital inflow)

A

Investment Spending = National Savings + Net capital inflow

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12
Q

Savings in a closed economy

A

Savings = National savings

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13
Q

Open economy savings

A

Savings = national savings + capital inflow

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14
Q

lonable funds market

A

A hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders

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15
Q

present value

A

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

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16
Q

present value formula

A

X = 1,000 / (1 + r)

1,000 is money you want to have in one year

x = present value of money

r = interest rate

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17
Q

Cause demand curve for lonable funds to shift

A

Changes in perceived business opportunities

Changes in government borrowing

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18
Q

crowding out

A

Occurs when a government budget deficit drives up the interest rate and leads to reduced investment spending

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19
Q

Shifts of the supply of Lonable funds

A

Changes in private savings behavior

Changes in net capital inflows

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20
Q

Real interest rate =

A

Real interest rate = nominal interest rate - inflation rate

21
Q

Fisher effect

A

An increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged

22
Q

wealth

A

the value of its accumulated savings

23
Q

financial asset

A

a paper claim that entitles the buyer to future income from the seller

24
Q

physical asset

A

a tangible object that can be used to generate future income

25
liability
a requirement to pay income in the future
26
4 types of financial assets
Loans stocks bonds bank deposits
27
3 problems for borrowers and lenders
transaction costs risk desire for liquidity
28
transaction costs
the expenses of negotiating and executing a deal
29
risk-averse
a person who is more sensitive to a loss than to a gain of an equal dollar
30
diversification
Investing in several different things so that the possible losses are independent events
31
liquid
If an asset can be quickly converted into cash with relatively little loss of value
32
illiquid
An asset that cannot be quickly converted into cash with relatively little loss of value
33
loan
a lending agreement between an individual lender and an individual borrower
34
default
Occurs when a borrower fails to make payments as specified by the loan or bond contract
35
securitization
process of pooling individual loans and selling shares in that pool
36
loan-backed security
An asset created by pooling individual loans and selling shares in that pool
37
Financial intermediary
An institution that transforms the funds it gathers from many individuals into financial assets
38
Types of financial intermediaries
mutual funds pension funds life insurance companies banks
39
pension fund
A type of mutual fund that holds assets in order to provide retirement income to its members
40
Life insurance company
Sells policies that guarantee a payment to a policyholder's beneficiaries when the policyholder dies
41
bank deposit
A claim on a bank that obliges the bank to give the depositor his or her cash when demanded
42
Bank
a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investment spending needs of borrowers
43
efficient markets hypothesis
Asset prices embody all publicly available information
44
random walk
the movement over time of an unpredictable variable
45
behavioral finance
The study of how investors in financial markets often make predictably irrational choices
46
loss aversion
unwilling to sell an unprofitable asset and accept the loss
47
herd mentality
buyinig an asset when its price has already been driven high and selling it when its price has already been driven low
48