Chapter 4: Financial System and the Process of Decision Making

Question 1

4.1 )What is Financial Assets and Do They have a Physical State?

Answer 1

Types of accounts in which their clients maintain balances. Property of clients who have deposited their money into them.

Financial Assets have no physical state.

Question 2

4 Common Financial Assets

Answer 2

Shares
Account Deposits
Loans (including mortgage)
Term Deposits
(SALT)

Question 3

What 2 types of Financial Assets do the bank provide and own? And 3 Examples

Answer 3

They provide and own loans to their customers.

Provide a form of security for financial institutions through collateral.

Examples of loans:
Lines of Credit
Car Loan
Mortgages

Question 4

What are Non-Financial Assets? Do They Have a Physical State? 4 Examples

Answer 4

Non-financial Assets are assets with a physical state.
Not created by the banks.

Examples:
Land
Equipment
Machinery
Buildings

Question 5

4.2) Briefly Explain Flow of Funds

Answer 5

The borrowing and lending process requires the availability of funds for the lender to make to a borrower.

Question 6

What Function Needs to Be Met for Financial Institutions to lend?

Answer 6

Function of saving.

Once saving has been accomplished, the funds can flow to borrowing clients.

Question 7

What happens to Excess Funds on Deposit?

Answer 7

Lenders will convert reserves (excess funds) into loans to eligible borrowers.

Question 8

Borrowers make _______ Payments to their ______

Answer 8

Interest

Lenders

Question 9

Lenders make ______ Payments the their _____ _____

Answer 9

Interest

Saving Clients

Question 10

FLOW OF FUNDS

explain the 4 activities

Answer 10

Household Sector —–> Business Sector
Land, Capital, Land, and Enterprise

Business Sector —–> Household Sector
Consumer goods and services

Household Sector —–> Business Sector
Consumption Spending

Business Sector -----> Household Sector
Factor incomes (Wages interest, rent, profit)

Question 11

Can the Flow of Funds be Disrupted? Explain.

Answer 11

The flow of funds cannot be disrupted. Clients have access to their funds and may withdraw money. Other clients will be depositing money into their account, enabling the flow of funds to continue.

Question 12

4.3) The Economy depends on what?

Answer 12

Our consumption of goods and services.

Question 13

The More ____ we ____, the More _____ we _____

Answer 13

money earned

money spent

Question 14

3 Activities related to consumption and Slow economy

Answer 14

Spend and consume lesser amounts
Afraid Economy will worsen so people save money
Enough money to spend on day-to-day purchases

Question 15

Total Consumption in our economy’s GDP is what percent range? and the Percentage of exports

Answer 15

60% - 70%

30%-40%

Question 16

Define Utility Maximization. Briefly Explain.

Answer 16

The act of consuming to make ourselves as happy as possible.

Our happiness comes from purchases of the better things than what we currently have. ex. newer car

Question 17

What are the two main reasons clients come to us? And how is it achieved?

Answer 17

Utility Maximization & Consumption

Achieved through clients borrowing money to meet those needs to better things. Ex. Vehicles, homes, vacations.

Clients want more than just their basic needs

Question 18

What Judgements not to make for the clients?

And what is Perspective of clients cash flow? Explain.

Answer 18

Validity or appropriateness

The judgement of validity is not to be made for the client, they can do that for themselves. Our job is to ensure the ability of the client to handle the loan in the most financially responsible way possible.

Question 19

4.4) Explain savings

Answer 19

Savings is income earned, but not spent
or
postponed consumption

Question 20

4 Determinants of saving

Answer 20

1. Transaction Demand
   Used for day-to-day spending
2. Precautionary Demand
   3 months worth of emergency funds
3. Speculative Demand
   Used for Investment purposes
4. Attitude towards Money
   Instant gratification
   or frugal with their money

Question 21

3 Components of Financial Literacy

Answer 21

1. Understanding Financial Issues
2. Achieving a level of financial responsibility
3. Acquiring the tools achieve and maintain financial stability

Question 22

Financial Literacy has no connection between 4 factors, what are they?

Answer 22

Age
Income level
Formal Education
Social Position

Question 23

3 importance why Financial Literacy important to us?

Answer 23

A determinant of savings
Greatest value to our clients
Able to Manage frustrations