Chapter 10 - Finance, Saving, and Investment

Question 1

Gross investment

Answer 1

the total amount spent on new capital

Question 2

Net investment

Answer 2

the change in the quantity of capital, equals gross investment minus depreciation

Question 3

Wealth

Answer 3

the value of all the things that people own

Question 4

Markets for financial capital

Answer 4

savings are the source of funds that are used to finance investment
Three types of financial market:
1) loan markets - short term , debt market
2) bond market - short term, debt markets
3) stock market - equity markets

Question 5

Financial institution

Answer 5

is a firm that operates on both sides od the markets for financial capital, it borrows in one market and lends in another

Question 6

Net worth

Answer 6

the total market value of what a financial institution has lent minus the market value of what it has borrowed

Question 7

Flows in the loanable fund markets

Answer 7

Demand:
Business investment
Government budget deficit
International investment or lending

Supply:
Private saving
Government budget surplus
International borrowing

Question 8

What determines investment and the demand for loanable funds?

Answer 8

The real interest rate

expected profit

Question 9

Demand for loanable funds

Answer 9

relationship between the quantity of loanable funds demanded and the real interest rate - interest goes down -> demand goes up

Question 10

Supply of loanable funds

Answer 10

total funds available from private saving, the government budget surplus, and international borrowing during a given period. Saving is the main source of supply of loanable funds
relationship between the quantity of loanable funds supplied and the real interest rate.

Question 11

Shifts of the supply of loanable funds curve

Answer 11

Factors that shifts the supply curve are:

1) Disposable income
2) wealth
3) expected future income
4) default risk

Question 12

Ricardo-barro effect

Answer 12

the effects we’ve just seesn is wrong, and the government budget deficit has not effect on the real interest rate or investment. rational taxpayers can see that a deficit today means that future taxes be higher and future disposable income be smaller. with smaller expected future disposable incomes, savings increase. the increase in saving increases the supply of lovable funds, shifts the SLF rightwards.