Chapter 26 Flashcards
Financial system
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
Capital or Physical Capital
The tools, instruments, machines, buildings, and other items that are used to produce goods and services
Gross investment
The total amount spent on new capital
Net investment
The change in quantity of capital – equals gross investment minus depreciation.
Wealth
The value of all the things that people own.
Loan Markets
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.
Bond Markets
The market for bonds, which are a promise to pay a specified sum of money on a specified date.
Stock Markets
The market for stocks, which are certificates of ownership and claim to the profits that a firm makes.
Investment banks
a bank that purchases large holdings of newly issued shares and resells them to investors.
Commercial banks
a bank that offers services to the general public and to companies.
Government sponsored mortgage lenders
Fannie Mae and Freddie Mac
Pension funds
a fund from which pensions are paid, accumulated from contributions from employers, employees, or both.
Insurance companies
A business that provides coverage, in the form of compensation resulting from loss, damages, injury, treatment or hardship in exchange for premium payments.
Stocks, bonds and loans are all considered
financial assets.
Because the interest rate is a percentage of the price of an asset, if the price rises, the interest rate __
falls
The loanable funds market is the __
aggregate of the markets for loans, bonds, and stocks
In the market for loanable funds, there is just one average interest rate which we refer to as __
the interest rate.
Loanable Funds Used For:
- Business investment
- Governmental budget deficit
- International investment or lending
Loanable Funds Come From:
- Private saving
- Governmental budget surplus
- International borrowing
The Quantity of loanable funds demanded is
the total quantity of funds demanded to finance investment, the government budget deficit, and international investment or lending during a given period.
The real interest rate is
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.
the higher the real interest rate
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.
When expected profit changes,
the demand for loanable funds changes.
the greater the expected profit from new capital,
the greater is the demand for loanable funds
The quantity of Iloanable funds supplied is
the total funds available from private saving, the government budget surplus, and international borrowing during a given period.
The real interest rate is the
determinant of the quantity of loanable funds supplied.
The supply of loanable funds are influenced by
Disposable income
Wealth
Expected future income
Default risk
A government budget surplus will
Increase the supply of loanable funds;
Decrease the real interest rate;
Decrease private savings; and
Increase the quantity demanded of loanable funds.
A government surplus increases
supply
Supply increases causes
real interest rate to fall
A fall in real interest results in
less private saving and more investment.
A government budget deficit will
Increase the demand of loanable funds;
Increase the real interest rate;
Increase private savings; and
Increase the quantity demanded of loanable funds.
A government deficit
increases demand
Demand increase causes
real interest rate to rise
An increase in real interest results in
less investment and more saving
The Crowding Out Effect
the tendency for a government budget deficit to raise the real interest rate and decrease investment.
The government’s demand for loanable funds drives out
private demand and investment does not increase by the full amount of the deficit.
