Chapter 10 - Savings, Investment, Spending and the Financial System

Question 1

Savings (Domestic/National Savings same as Domestic Investments) =

Answer 1

Y-C-G

Question 2

Savings (Private) =

Answer 2

Y-C-(T-TR)

Question 3

Savings (Public/Government Budget Balance)

Answer 3

T-G-TR

Question 4

Market for Loanable Funds Supply comes from…

Answer 4

Household saving money for future consumption

Question 5

Market for Loanable Funds Demand Comes from…

Answer 5

Firms looking to make Investments

Question 6

As real interest rates rises….

Answer 6

firms are less likely to borrow money and households more likely to save money

Question 7

Shifts in Demand of Loanable Funds

Answer 7

Perceived changes in business opportunities - a change in beliefs of payoffs for investments increasing or decreasing. ex: technology increasing profitability for new investments.

Changes in Gov. Spending. Deficit shifts to the right equaling higher interest rate leading to crowding out.

Question 8

Shifts in Supply of Loanable Funds

Answer 8

Changes in Private Behavior

Changes in Net Capital Flows. More inflow increases supply of loanable funds.

Question 9

Crowding Out

Answer 9

An increase in the Gov. Deficit will reduce private investment spending

Question 10

The Fisher Effect

Answer 10

changes in expected inflation increase the nominal interest rate

Question 11

Financial Market

Answer 11

where households invest their wealth to buy financial assets

Question 12

Financial Assets

Answer 12

paper claim that entitles the buyer to future income form the seller

Question 13

Physical Assets

Answer 13

tangible objects used to generate future income

Question 14

Liability

Answer 14

an obligation to pay income in the future

Question 15

Three Functions of the Financial System

Answer 15

1. Reduce Transaction Costs
2. Reduce Risk
3. Provide Liquidity

Question 16

Types of Financial Assets

Answer 16

Loans
Bonds
Loan-Backed Securities
Stocks

Question 17

Loans

Answer 17

Lending agreements between a lender and a borrower

Question 18

Bonds

Answer 18

an IOU between the borrower and lender where the borrower pays a fixed amount over time plus the principle at the end of a specified time frame

Question 19

Loan-Backed Securities

Answer 19

assets made by pooling individual loans and selling shares in that pool

Question 20

Stocks

Answer 20

shares in the ownership of a company

Question 21

Financial Intermediary

Answer 21

an institution that transforms funds from many individuals into financial assets.

Question 22

Four Major Financial Intermediaries

Answer 22

Mutual Funds
Pension Funds
Life Insurance Companies
Banks

Question 23

Mutual Fund

Answer 23

creates a stock portfolio by buying and holding shares in companies and then selling shares of the stock portfolio to individual investors.

Question 24

Pension Fund

Answer 24

nonprofit institutions that collect the savings of their customers and invest the funds in a variety of assets, providing them with income when they retire

Question 25

Life Insurance Companies

Answer 25

companies that guarantee a payment to the policyholder’s beneficiaries when the policyholder dies

Question 26

Banks

Answer 26

Collect Deposits from individuals and use those deposits to provide investment funds to borrowers

Question 27

Present Value (take into account when investing)

Answer 27

amount at end of period = x(1-r)

Question 28

Efficient Market Hypothesis

Answer 28

asset prices embody all publicly available information

Question 29

Random Walk

Answer 29

the movement of stock prices over time in a unpredictable way. Contradicts efficient market hypothesis.