Chapter 8 Flashcards
Define financial system
The group of institutions in the economy that help to match one person’s saving with another person’s investment.
What are the components of the financial system
Financial markets (e.g., bond markets, stock markets) and financial intermediaries (e.g., banks, mutual funds).
What makes up financial markets
- bond market
- stock market
define bond market
Facilitates the borrowing of funds by selling bonds (debt finance).
define stock market
Allows firms to raise funds by issuing stocks (equity finance).
What are the financial intermediatires
- banks
- mutual funds
Why are banks financial intermediaries
they accept deposits and make loans
why are mutual funds intermediaries
Institutions that sell shares to the public and use the proceeds to buy a portfolio of stocks and bonds.
Provide the 4 saving and investments
- Private saving
- Public saving
- national saving
- investment
define private saving
The income that households have left after paying for taxes and consumption.
define public saving
The tax revenue that the government has left after paying for its spending.
define national saving
The sum of private saving and public saving, representing the total income in the economy that remains after paying for consumption and government purchases.
define investment
The purchase of new capital, such as equipment or buildings.
Define market for loanable funds
A conceptual market where savers supply funds and borrowers demand funds.
How does interest rate fit into market for loanable funds
Interest Rate: The price of borrowing in the loanable funds market, determined by the supply and demand for loanable funds.
What are the determinants of saving and investment
- interest rates
- government policies
- Budget deficits and surpluses
Define interest rates as a determinant of saving and investment
Higher interest rates provide more incentive for saving (supply of loanable funds).
Lower interest rates make borrowing cheaper, encouraging investment (demand for loanable funds).
Define government policies as it relates to saving and investment
Taxes on interest income can affect the incentive to save.
Investment tax credits can encourage firms to invest.
Define budget deficits relates to saving and investment
A government budget deficit reduces national saving and the supply of loanable funds, leading to higher interest rates and lower investment.
Define budget surplus and how it relates to saving and investment
A government budget surplus increases national saving and the supply of loanable funds, leading to lower interest rates and higher investment.
What is crowding out and provide an example
Definition: When government borrowing reduces the amount of funds available for private investment.
Example: Increased government spending financed by borrowing can lead to higher interest rates, which can discourage private investment.
What is the supply curve
Represents the amount of saving at different interest rates.
What is the demand curve
Represents the amount of borrowing for investment at different interest rates.
What is equilibrium
Where the supply and demand curves intersect, determining the equilibrium interest rate and quantity of loanable funds.
Provide two examples of policy impact
Example: A tax incentive for saving shifts the supply curve to the right, lowering interest rates and increasing the quantity of loanable funds.
Example: An investment tax credit shifts the demand curve to the right, raising interest rates and increasing the quantity of loanable funds.
