Chapter 26

Question 1

Financial system

Answer 1

is the group of institutions in the economy that help to match one person’s saving with another person’s investment. It effectively moves scarce resources from savers to borrowers

Question 2

Capital or Physical Capital

Answer 2

The tools, instruments, machines, buildings, and other items that are used to produce goods and services

Question 3

Gross investment

Answer 3

The total amount spent on new capital

Question 4

Net investment

Answer 4

The change in quantity of capital – equals gross investment minus depreciation.

Question 5

Wealth

Answer 5

The value of all the things that people own.

Question 6

Loan Markets

Answer 6

The market for loans in which there are those who loan funds and those who borrow them. Loanable funds refers to all income that people have chosen to save and lend out, rather than use for their own consumption.

Question 7

Bond Markets

Answer 7

The market for bonds, which are a promise to pay a specified sum of money on a specified date.

Question 8

Stock Markets

Answer 8

The market for stocks, which are certificates of ownership and claim to the profits that a firm makes.

Question 9

Investment banks

Answer 9

a bank that purchases large holdings of newly issued shares and resells them to investors.

Question 10

Commercial banks

Answer 10

a bank that offers services to the general public and to companies.

Question 11

Government sponsored mortgage lenders

Answer 11

Fannie Mae and Freddie Mac

Question 12

Pension funds

Answer 12

a fund from which pensions are paid, accumulated from contributions from employers, employees, or both.

Question 13

Insurance companies

Answer 13

A business that provides coverage, in the form of compensation resulting from loss, damages, injury, treatment or hardship in exchange for premium payments.

Question 14

Stocks, bonds and loans are all considered

Answer 14

financial assets.

Question 15

Because the interest rate is a percentage of the price of an asset, if the price rises, the interest rate __

Answer 15

falls

Question 16

The loanable funds market is the __

Answer 16

aggregate of the markets for loans, bonds, and stocks

Question 17

In the market for loanable funds, there is just one average interest rate which we refer to as __

Answer 17

the interest rate.

Question 18

Loanable Funds Used For:

Answer 18

1. Business investment
2. Governmental budget deficit
3. International investment or lending

Question 19

Loanable Funds Come From:

Answer 19

1. Private saving
2. Governmental budget surplus
3. International borrowing

Question 20

The Quantity of loanable funds demanded is

Answer 20

the total quantity of funds demanded to finance investment, the government budget deficit, and international investment or lending during a given period.

Question 21

The real interest rate is

Answer 21

the opportunity cost of the funds used to finance the purchase of capital, and firms compare the real interest rate with the rate of profit they expect to earn on their new capital.

Question 22

the higher the real interest rate

Answer 22

the smaller is the quantity of loanable funds demanded, and the lower the real interest rate, the greater is the quantity of loanable funds demanded.

Question 23

When expected profit changes,

Answer 23

the demand for loanable funds changes.

Question 24

the greater the expected profit from new capital,

Answer 24

the greater is the demand for loanable funds

Question 25

The quantity of Iloanable funds supplied is

Answer 25

the total funds available from private saving, the government budget surplus, and international borrowing during a given period.

Question 26

The real interest rate is the

Answer 26

determinant of the quantity of loanable funds supplied.

Question 27

The supply of loanable funds are influenced by

Answer 27

Disposable income
Wealth
Expected future income
Default risk

Question 28

A government budget surplus will

Answer 28

Increase the supply of loanable funds;
Decrease the real interest rate;
Decrease private savings; and
Increase the quantity demanded of loanable funds.

Question 29

A government surplus increases

Answer 29

supply

Question 30

Supply increases causes

Answer 30

real interest rate to fall

Question 31

A fall in real interest results in

Answer 31

less private saving and more investment.

Question 32

A government budget deficit will

Answer 32

Increase the demand of loanable funds;
Increase the real interest rate;
Increase private savings; and
Increase the quantity demanded of loanable funds.

Question 33

A government deficit

Answer 33

increases demand

Question 34

Demand increase causes

Answer 34

real interest rate to rise

Question 35

An increase in real interest results in

Answer 35

less investment and more saving

Question 36

The Crowding Out Effect

Answer 36

the tendency for a government budget deficit to raise the real interest rate and decrease investment.

Question 37

The government’s demand for loanable funds drives out

Answer 37

private demand and investment does not increase by the full amount of the deficit.