Chapter 10 - Saving & Investment

Question 1

A capital investment that is owned and operated by a foreign entity is called what?

Answer 1

A Foreign Direct Investment

Question 2

A capital investment in financial assets (Shares, Bonds etc) by a foreign entity is called what?

Answer 2

A Foreign Portfolio Investment

Question 3

A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a?

Answer 3

Bond

Question 4

An example of equity finance is?

Answer 4

Buying stocks

Question 5

The amount of income that households have left after paying for their consumption and taxes is known as?

Answer 5

Private Saving

Question 6

In a closed economy national savings must be equal to?

Answer 6

Must be equal to investment

Question 7

If the government increases the GST rate what would you expect to happen to the loanable funds market?

Answer 7

• The supply curve of loanable funds would shift to the right (Saving Increases)
• Interest rate falls (As more money is available for investment)
• The quantity of loanable funds saved and invested rises (As interest rates are now low)

Question 8

What is a bond that has an infinite term called?

Answer 8

A Perpetuity

Question 9

If, in a closed economy, public saving falls, and there is no change to private saving, what will increase?

Answer 9

The interest rate will increase (As less money is available to loan)

Question 10

On what bonds would you expect to pay a higher interest rate?

Answer 10

Bonds with higher risk associated to them (e.g. newer/smaller businesses)

Question 11

What is the equations that represents GDP in a closed economy?

Answer 11

Y = C + I + G
GDP = Spending by consumers + Investment by businesses + Government spending

Question 12

What is the financial system?

Answer 12

The financial system is a market in which people and entities trade financial securities, commodities and other fungible items.

Question 13

What is the role of the financial system?

Answer 13

To match one person’s savings with another person’s investment.

Question 14

What are the two markets that are part of the financial system in our economy?

Answer 14

• The bond market, through which large corporations and state/local governments borrow.
• The share market, through which corporations sell ownership shares.

Question 15

What are the two financial intermediaries of the financial system in our economy?

Answer 15

• Banks, which take in deposits and use the deposits to make loans
• Managed funds which sell shares to the public and use the proceeds to buy a portfolio of financial assets.

Question 16

What are the four institutions that make up the financial system?

Answer 16

• Bond Market
• Share Market
• Banks
• Managed Funds

Question 17

To an economist what is saving?

Answer 17

When a persons income exceeds their expenditure

Question 18

To an economist what is investment?

Answer 18

When a person of firm purchases new capital goods (e.g. house, new equipment). Capital goods are inputs for production

Question 19

You take out a mortgage and purchase a new house

Does this situation represent saving or investment? why?

Answer 19

Investment.
This is the purchase of a new capital good. A house is capable of generating rental income, whether or not it is owner occupied.

Question 20

You buy shares in Fisher & Paykel Healthcare

Does this situation represent saving or investment? why?

Answer 20

This represents saving as your income is not being spent of consumption goods. The shares purchased add to assets just like all types of saving. Shares are not durable input for productive activity and therefore do not count as investment.

Question 21

Depositing money into your bank account

Does this situation represent saving or investment? why?

Answer 21

Represents saving, as the money is not being spent on consumption goods

Question 22

Borrow from the bank to buy a car for your pizza delivery service

Does this situation represent saving or investment? why?

Answer 22

Investment, as the car is a capital good. i.e. durable input for productive activity

Question 23

What are Private Savings, and how are they calculated?

Answer 23

Private savings is the income left over after paying for tax and consumption

Y - T - C

Question 24

What is investment in the economy and how is it calculated?

Answer 24

Investment in the economy is Private Savings less Government surplus/deficit

(Y - T - C) - (T(rev) - G)

Question 25

How are total savings in the economy calculated?

Answer 25

Total economy savings are equal to Government Tax Revenue less Government Expenditure

T - G

Question 26

How is a government surplus/deficit related to the supply of loanable funds?

Answer 26

A surplus means that more money will be available for investment and therefore interest rates should go down.

A deficit means that less money is available for investment and interest rates should rise.

Question 27

If the government were to make earnings from interest tax free, what would happened on the loanable funds market graph?

Answer 27

Removing tax from interest earned would incentivise saving as it would be a more profitable form of investment. Therefore The supply curve on the loanable funds graph would shift to the right as it has increased. This would create a new equilibrium point where interest rates are lower and demand for loans is higher.

Question 28

What would happen to the loanable funds market if the government had a budget surplus?

Answer 28

The supply of loanable funds would increase, shifting the curve to the right. Thus lower interest and increasing the amount of loans demanded.