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Macroeconomics > Chapter 9: Saving, Investment, and the Financial System > Flashcards

Chapter 9: Saving, Investment, and the Financial System Flashcards

1
Q

What are savings?

A

Income that is not spent on consumption goods

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2
Q

What is investment?

A

The purchase of new capital including tools, machinery, and factories

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3
Q

What are the 4 major factors that determine the supply of savings?

A
  1. smoothing consumption
  2. impatience
  3. marketing and psychological factors
  4. interest rates
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4
Q

What does smoothing consumption mean?

A

People save for retirement while they are working so there isn’t a dramatic drop in their consumption when they are ready to retire

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5
Q

What is time preference?

A

the desire to have goods and services sooner rather than later

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6
Q

What is behavioral economics?

A

Studies how people make decisions and how they can be helped to overcome biases in decision making

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7
Q

All else being equal, higher interest rates lead to more _______.

A

savings

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8
Q

What are the two main reasons that people borrow?

A
  1. To smooth their consumption

2. To finance large investments

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9
Q

What is the lifecycle theory of savings?

A

By borrowing, saving and dissaving, workers can smooth their consumption path over a lifetime, improving their overall satisfaction

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10
Q

What is the law of demand in borrowing?

A

The lower the interest rate, the greater the quantity of funds demanded for investment

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11
Q

As interest rates increase, the quantity of funds demanded ______.

A

falls

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12
Q

What is the market for loanable funds?

A

Occurs when suppliers of loanable funds (savers) trade with demanders of loanable funds (borrowers). Trading in the market for loanable funds determines the equilibrium interest rate.

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13
Q

If the interest rate rises above the equilibrium how will supply and demand be affected?

A

The quantity of savings supplied would exceed the quantity of savings demanded creating a surplus of savings

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14
Q

If the interest drops below the equilibrium how will supply and demand be affected?

A

The quantity demanded would exceed the quantity supplied causing a shortage

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15
Q

What does an increase in the supply of savings do to savings and the interest rate?

A

It increases savings and reduces the interest rate

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16
Q

An increased willingness to save has what effect on the supply curve?

A

It shifts it to the right and down

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17
Q

What does a decrease in investment demand do to savings and the interest rate?

A

It decreases savings and decreases the interest rate

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18
Q

What does a in investment tax credit do?

A

It gives firms that invest in plants and equipment a tax break

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19
Q

When a tax credit is available firms are more willing to ______.

A

invest

20
Q

What do usury laws do?

A

They impose a maximum ceiling on the interest rate than can be charged on a loan

21
Q

What does an investment tax credit do to the quantity of savings and the interest rate?

A

It increases the quantity of savings and increases the interest rate

22
Q

What do usury laws do to savings?

A

They create a shortage because of the ceiling on interest rates

23
Q

What are financial intermediaries?

A

institutions such as banks, bond markets, and stock markets that reduce the costs of moving funds from savers to borrowers and investors

24
Q

How do banks turn a profit?

A

They receive savings from people who deposit their money, pay them a very small interest and then loan those funds to other people and charge them a higher interest

25
Q

What is a bond?

A

A sophisticated IOU that documents who owes how much and when payment must be made

26
Q

When a member of the public lends money to a corporation, the corporation acknowledges its debt by issuing a _____.

A

bond

27
Q

What is collateral?

A

something of value that by agreement becomes the property of the lender if the borrower defaults

28
Q

What does crowded out mean?

A

the decrease in private consumption and investment that occurs when government borrows more; also the decrease in private spending that occurs when government increase spending

29
Q

Calculate rate of return for a zero coupon bond

A

([Face Value-Price] / Price) * 100

30
Q

What is a zero coupon bond?

A

a bond that pays only at maturity

31
Q

Interest rates and bond prices move in _________ directions

A

opposite

32
Q

What is arbitrage?

A

the practice of taking advantage of price difference for the same good in different markets by buying low in one market and selling high in another market

33
Q

Why do firms issue shares of stock?

A

To fund activities

34
Q

How do stockholders benefit from a firm’s profits?

A

distribution of dividends and retained earnings

35
Q

What is a stock?

A

a certificate of ownership in a company

36
Q

What is an IPO?

A

the first instances of a corporation selling stock to the public in order to raise capital

37
Q

What is owner’s equity?

A

the value of the asset minus the debt

E=V-D

38
Q

What is leverage ratio?

A

the ration of debt to equity

D/E

39
Q

What does more leverage mean?

A

the same force(cash) can be used to move (buy) bigger and bigger assets

40
Q

What does insolvent mean?

A

when a bank’s liabilites are greater in value then its assets

41
Q

What is securitization?

A

The seller of a securitized asset gets up front cash while the buyer gets the right to a stream of future payments

42
Q

Mortgage loans were bundled together and sold as financial ______.

A

assets

43
Q

What is the shadow banking system?

A

includes investment banks, hedge funds, money market funds, etc.

44
Q

How are investment banks funded?

A

by investors

45
Q

If leverage ratios are high, what happens wen there is a decline in asset values?

A

It wipes out the equit cushion of the bank and pushes the bank towards insolvency

Macroeconomics (16 decks)

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