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Macroeconomics (key terms) > Chapter 26: Saving, Investment, and the Financial System > Flashcards

Chapter 26: Saving, Investment, and the Financial System Flashcards

1
Q

Financial system

A

The group of institutions in the economy that help match borrowers and lenders.

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2
Q

Financial markets

A

Financial institutions through which savers can directly lend to borrowers

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3
Q

(a) Financial intermediaries

(b) Why do other intermediaries only offer savers a “store of value” ?

A

(a) Financial institutions through which savers can indirectly lend to borrowers
(b) Because their saving is not as accessible

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4
Q

(a) Bank
Banks (b)____ on deposits and charge a slightly
higher rate on (c)____

A

(a) Institution that collects deposits and makes loans
(b) pay interest
(c) their loans

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5
Q

(a) Medium of exchange

(b) Why do banks create a “medium of exchange” when they accept a deposit ?

A

(a) Spendable asset such as a checking deposit

(b) Because individuals can write checks against the deposit to engage in transactions

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6
Q

Bond

A

Certificate of indebtedness or IOU (I owe you)

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7
Q

Stock

A

Certificate of ownership of a small portion of a large firm

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8
Q

(a) Mutual fund

(b) What is one target of mutual fund ?

A

(a) Institution that sells shares and uses the proceeds to buy a diversified portfolio (group of stocks and/or bonds)
(b) It allows small savers access to professional money managers

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9
Q

Closed economy

A

An economy with no international transactions

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10
Q

National saving (often referred to as simply saving)

A

The income that remains after consumption expenditures and government purchases

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11
Q

Private saving = Y – T – C

A

The income that remains after consumption expenditures and taxes

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12
Q

Public saving = T – G

A

The tax revenue that the government has left after paying for its spending

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13
Q

Budget surplus

A

An excess of tax revenue over government spending causing public saving to be positive

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14
Q

Budget deficit

A

A shortfall of tax revenue relative to government spending that causes public saving to be negative

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15
Q

Government debt

A

The accumulation of past budget deficits

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16
Q

Investment

A

Expenditures on capital equipment and structures

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17
Q

Market for loanable funds

A

The market in which those who want to save supply funds and those who want to borrow to invest demand funds

18
Q

(a) Demand for loanable funds

It comes from (b)____

A

(a) The amount of borrowing for investment desired at each real interest rate
(b) national saving

19
Q

(a) Supply of loanable funds

It comes from (b)____.

A

(a) The amount of saving made available for lending at each real interest rate
(b) households and firms wishing to borrow to invest

20
Q

Crowding out

A

A decrease in investment as a result of government borrowing

21
Q

bond market

A

large borrowers borrow directly from the public by selling bonds

22
Q

What does a bond specify?

A
  • date of maturity (the date the loan will be repaid)

- principal (the amount borrowed and to be repaid at maturity)

23
Q

Bond issues differ in three main ways

A
  • terms (time to maturity)
  • credit risk (probability of default)
  • types of tax treatment
24
Q

Why are Longer-term bonds riskier ?

A

Because Longer-term bonds usually pay higher interest and the owner of the bond may need to sell it before maturity at a depressed price

25
Q

Junk bonds

A

exceptionally risky bonds

26
Q

Why do municipal bonds pay lower interest?

A

Becasue the interest received from owning a municipal bond (bond issued by state or local government) is tax exempt

27
Q

stock market

A

large firms raise funds for expansion by taking on additional “partners” or owners of the firm

28
Q

Why is the sale of stock called “equity finance” while the sale of bonds is called “debt finance” ?

A

Owners of stock share profits or losses of the firm while owners of bonds receive fixed interest payments as creditors.
=> The stockholder accepts more risk than the bondholder accepts but has a higher potential return

29
Q

Stocks don’t mature or expire and are traded on (a)___ such as the New York Stock Exchange and NASDAQ
Stock prices are determined by (b)____ and (c)____ of the firm’s future profitability

A

(a) stock exchanges
(b) supply and demand
(c) reflect expectations

30
Q

Why do small businesses usually borrow from banks?

A

Because they are too small to sell stock or bonds

31
Q

There are two reasons why index funds outperform actively managed funds:

  • First, it is hard to pick stocks whose prices will rise (a)____
  • Second, (b)____ by rarely buying and selling and by not having to pay the salaries of professional money managers.
A

(a) because market price of stock is already good reflection of company’s true value.
(b) index funds keep costs low

32
Q

“supply of loanable funds” comes from (a)____.

“Demand for loanable funds” comes from (b)____

A

(a) national saving

(b) households and firms wishing to borrow to invest

33
Q

(a) Reduced taxation on interest and dividends
(b) Reduced taxation if one invests
(c) A reduction in government debt and deficits

A

(a) Real interest rates fall while saving and investment
rise.
(b) Real interest rates, saving, and investment rise.
(c) Real interest rates fall, and saving and investment
rise.

34
Q

Which is both a “store of value” and a “common medium of exchange” ?

A

checking account balances

35
Q

stock index

A

an average of an important group of stock prices.

36
Q

store of value

A

The function of an asset that can be saved, retrieved and exchanged at a later time.
The most common store of value in modern times has been money, currency, or a commodity like a precious metal, cryptocurrency or financial capital.

37
Q

beat index funds

A

buy all of the stocks in a stock index without the aid of ac tive management

38
Q

National Income Accounts

A

The record in relationship among income, output,

saving, investment, expenditures, taxes, and so on

39
Q

date of maturity

A

the date the loan will be repaid

40
Q

principal

A

the amount borrowed and to be repaid at maturity

Macroeconomics (key terms) (14 decks)

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