Chapter 7: Finance, Saving, Investing Flashcards
What are the key Canadian financial institutions?
- Banks
- Trust and loan companies
- Credit unions and caisses populaires
- Pension funds
- Insurance companies
These institutions play a significant role in the Canadian financial system.
Define physical capital.
The tools, instruments, machines, buildings, and other items produced in the past used today to produce goods and services.
Physical capital is essential for increasing production capacity.
What is financial capital?
The funds that firms use to buy physical capital.
Financial capital is crucial for investment in new technologies and infrastructure.
What is the source of funds used to finance investment?
Saving.
Savings are vital for economic growth as they provide the necessary funds for investments.
What are the three types of markets where funds are supplied and demanded?
- Loan markets
- Bond markets
- Stock markets
Each market serves a different purpose in the financial system.
What are financial assets?
- Stock
- Bonds
- Short-term securities
- Loans
Financial assets represent claims on future cash flows.
What is the relationship between the interest rate and the price of a financial asset?
They are inversely related.
When interest rates rise, the price of existing financial assets typically falls.
Fill in the blank: The equation Y = C + S + T represents how households use their income to buy consumption goods, save, and pay _______.
taxes.
This equation highlights the components of household income and expenditure.
What does the term ‘national saving’ refer to?
The sum of private saving (S) and government saving (T - G).
National saving is critical for funding investments in the economy.
What is the nominal interest rate?
The number of dollars that a borrower pays and a lender receives in interest in a year expressed as a percentage of the number of dollars borrowed or lent.
It reflects the cost of borrowing money.
How is the real interest rate calculated?
Nominal interest rate minus the inflation rate.
The real interest rate reflects the true cost of borrowing in terms of purchasing power.
What happens to the quantity of loanable funds demanded as the real interest rate increases?
It decreases.
Higher interest rates discourage borrowing.
What causes the demand for loanable funds curve to shift rightward?
An increase in expected profit from new capital during an expansion.
Higher expected profits lead to more investment and thus greater demand for loanable funds.
What is the quantity of loanable funds supplied?
The total funds available from private saving, a government budget surplus, and international borrowing during a given period.
This quantity is influenced by various economic factors.
What effect does a government budget surplus have on the real interest rate?
It lowers the real interest rate and increases the quantity of loanable funds.
A surplus can stimulate investment by making funds cheaper.
What is the crowding-out effect?
The tendency for a government budget deficit to raise the interest rate and decrease investment.
This effect can hinder economic growth.
True or False: The Ricardo-Barro effect states that government budget surpluses or deficits have no effect on the real interest rate or investment.
True.
This theory suggests that expectations about future taxes offset the effects of government borrowing.
