Krugman Textbook Chapter 10

Question 1

Savings-Investment Spending Identity

Answer 1

An accounting fact that states that savings and investment spending are always equal for the economy as a whole.

Question 2

National Savings

Answer 2

The sum of private savings and the government’s budget balance; the total amount of savings generated in the economy.

Question 3

Public Savings/ Budget Balance

Answer 3

The difference between net tax revenue and government spending on goods and services.

Question 4

Budget Surplus

Answer 4

A positive budget balance.

Question 5

Budget Deficit

Answer 5

A negative budget balance.

Question 6

Net Foreign Investment (NFI)

Answer 6

The total outflows of funds out of a country minus the total inflows of funds into that country.

Question 7

Loan-able Funds Market

Answer 7

A hypothetical market that brings together those who want to lend money (savers) and those who want to borrow (firms with investment spending projects).

Question 8

Present Value

Answer 8

The amount of money needed today in order to receive X amount of dollars at a future date given the interest rate.

Question 9

Crowding Out

Answer 9

The negative effect of budget deficits on private investment, at which occurs because government borrowing drives up interest rates.

Question 10

Fisher Effect

Answer 10

The principle where an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged.

Question 11

Wealth

Answer 11

The value of accumulated savings in a household.

Question 12

Financial Asset

Answer 12

A paper claim that entitles the buyer to future income from a seller. Loans, stocks, bonds, and bank deposits are types of financial assets.

Question 13

Physical Asset

Answer 13

A claim on a tangible object that can be used to generate future income.

Question 14

Liability

Answer 14

A requirement to pay income in the future.

Question 15

Transaction Costs

Answer 15

The expenses of negotiations and executing deals.

Question 16

Financial Risk

Answer 16

Uncertainty about future outcomes that involve financial losses or gains.

Question 17

Diversification

Answer 17

Investment in several different assets with unrelated, or independent, risks so that the possible losses are independent events.

Question 18

Liquid

Answer 18

Describes an asset that cannot be quickly converted into cash with relatively little loss of value.

Question 19

Loan

Answer 19

A lending agreement between an individual lender and an individual borrower. Loans are usually tailored to the individual borrower’s needs and ability to pay but carry relatively high transaction costs.

Question 20

Default

Answer 20

The failure of a borrower to make payments as specified by the bond or loan contract.

Question 21

Loan-Backed Securities

Answer 21

Assets created by pooling individual loans and selling shares in that pool.

Question 22

Financial Intermediary

Answer 22

An institution that transforms the funds it gathers from many individuals into financial assets.

Question 23

Mutual Fund

Answer 23

A financial intermediary that creates a stock portfolio by buying and holding shares in the companies and then selling shares of this portfolio to individual investors.

Question 24

Pension Fund

Answer 24

A type of mutual fund that holds assets in order to provide retirement income to its members.

Question 25

Life Insurances Company

Answer 25

A financial intermediary that sells policies guaranteeing a payment to a policyholders beneficiaries when the policyholder dies.

Question 26

Bank Deposit

Answer 26

A claim on a bank that obliges the bank to give the depositor his or her cash when demanded.

Question 27

Bank

Answer 27

A financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investments or investment spending needs of borrowers.

Question 28

Efficient Market Hypothesis

Answer 28

A principle of asset price determination that holds that asset prices embody all publicly available information. The hypothesis implies that stock prices should be unpredictable since changes should occur only in response to new information about fundamentals.

Question 29

Random Walk

Answer 29

The movement over time of an unpredictable variable.