Chapter 8: Savings, Investment, Financial Systems

Question 1

Financial system

Answer 1

Group of institutions in the economy that help match one persons savings with another persons investment

Question 2

Higher ____ raises a countries _______ and ____________

Answer 2

Productivity

Standards of living

Question 3

Financial institutions 2 categories

Answer 3

Financial markets

Financial intermediaries

Question 4

Financial markets

Answer 4

Institutions through which a person who wants to save can directly supply funds to a person who wants to borrow funds

Question 5

2 most important markets

Answer 5

Bond markets

Stock market

Question 6

Bond

Answer 6

Certificate of indebtness

An IOU

Question 7

Bonds term

Answer 7

Length until it matures

Question 8

Bonds credit risk

Answer 8

Probability that the borrower will fail to pay some of the interest or principal

Question 9

Stock

Answer 9

A claim to partial owenershop to a firm

Question 10

Financial intermediaries

Answer 10

Financial institutions through which savers can indirectly provide funds to borrowers

Question 11

2 most important intermediaries

Answer 11

Banks

Mutual funds

Question 12

Mutual funds

Answer 12

Institutions that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds

Question 13

Accounting

Answer 13

How various numbers are defined and added up

Question 14

GDP’s four components of expenditures

Answer 14

Consumption
Investment
Government purchases
Net exports

Question 15

Y

Answer 15

GDP

Question 16

C

Answer 16

Consumption

Question 17

I

Answer 17

Investment

Question 18

G

Answer 18

Government purchases

Question 19

NX

Answer 19

Net exports

Question 20

Equation for GDP

Answer 20

Y=C+I+G+NX

Question 21

Close economy GDP formula

Answer 21

Y=C+I+G

No NX as a closed economy doesn’t trade

Question 22

Financial markets GDP formula

Answer 22

I=Y-C-G

Question 23

National savings

Answer 23

Total income in the economy that remains after paying for consumption and givement purchases

Question 24

Substituting Savings for Y-C-G gives us

Answer 24

S=I

Savings = investment

Question 25

Two ways to write national savings

Answer 25

S=Y-C-G

S=(Y-T-C)+(T-G)

Question 26

Private savings

Answer 26

Income that households have left after paying for taxes and consumption

Y-T-C part of equation

Question 27

Public savings

Answer 27

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

(T-G)

Question 28

Budget surplus

Answer 28

An excess of tax revenue over government spending

T>G

Question 29

Budget deficit

Answer 29

Shortfall of tax revenue from government spending

G>T

Question 30

Market for loanable funds

Answer 30

Market in which those who want to save supply funds and those who want to borrow invested demand funds

Question 31

Government debt

Answer 31

Sum of all past budget deficits and surpluses

Question 32

Crowding out

Answer 32

Decrease in investment that results from government borrowing

Question 33

Vicious cycle

Answer 33

Cycle that results when deficits reduce the supply of loanable funds, increase interest rates, discourage investment, and result in slower economic growth

Slower growth leads to lower tax renecue and higher spending on income support programs and the result can be even higher budget deficits

Question 34

Virtuous cycle

Answer 34

The cycle that results when surpluses increase the supply of loanable funds, reduce interest rates, stimulate investment, and result in faster economic growth

Faster growth leads to higher tax revenue and lower spending on income support programs, and the results can be even higher budget surpluses