Chapter 8 - SAVING, INVESTMENT AND FINANCIAL SYSTEM Flashcards
What is a financial system? And what categories can it be grouped into?
The group of institution in the economy that help to match one person’s savings with another person’s investment.
Financial markets (stock market/bond market)
Financial intermediaries (banks)
What is budget deficit respectively budget surplus?
deficit: T<G
surplus: T>G
What does investment refers to in macroeconomic?
The purchase of new capital, such as equipment or building.
When a person borrows from a bank to build a new house, the person adds to the nation’s investment. Similarly, if a person sells some stock and uses the proceeds to build a new factory, it also adds to the nation’s investment.
What is included in the supply of loanable funds?
The supply of loanable funds comes from national saving, including both private saving and public saving.
What are the policies in the market for loanable funds?
1) Saving incentives
2) Investment incentives
3) Government budget deficits and surpluses
What does saving incentives imply?
It will reduces the equilibrium interest rate –> raises the equilibrium of loanable funds.
What is crowding out?
The fall in investment because of the government borrowing. That is, when the government borrows to finance its budget deficit, it crowds out private borrowers who are trying to finance investment.
If a popular TV show on personal finance convinces more Canadians about the importance of saving for retirement, the ___ curve for loanable funds would shift, driving the equilibrium interest rate ___.
supply, down
If the public consumes $10 billion less and the government purchases $10 billion more (assuming other things are unchanged):
a) There is a decrease in saving, and the economy should grow more slowly.
b) There is an increase in saving, and the economy should grow more quickly.
c) Saving remains the same.
C
What occurs when the government collects more in tax revenue than it spends, and households consume more than they get in after-tax income?
private saving is negative, but public saving is positive
If GDP = $1000, consumption = $600, taxes = $100, and government purchases =
$200, which choice below indicates how much saving and investment are?
saving = $200; investment = $200
If Canadians become less concerned about the future and save less at each real interest rate, real interest rates will:
rise, and investment will fall.
If the business community becomes more optimistic about the profitability of capital, the ___ curve for loanable funds would shift, driving the equilibrium interest rate ___.
demand, up
If the supply of loanable funds is very inelastic (steep), saving and investment will increase the most due to the policy of:
an increase in a budget surplus
Which one of the following would be expected to occur if Canadians saved a greater percentage of their income?
The supply of loanable funds would shift to the right, and real interest rate would fall.
