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OSB > Lecture 7 > Flashcards

Lecture 7 Flashcards

1
Q

What are financial markets?

A

institutions through which savers can directly provide funds to borrowers

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2
Q

What are the two different type of financial markets?

A
  • share market

- bond market

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3
Q

Both bond and share markets are ways to link up people who have and people who need what?

A

funds

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4
Q

What are share (stock) sales?

A

this is the issuing of new stocks, not just buying and selling existing stocks so now you have a share of the profits

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5
Q

What is a bond?

A

this is a certificate of indebtedness that specifies obligations of the borrower to the holder of the bond

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6
Q

What does a bond identify?

A
  • the time at which the principal of the loan will be repaid (the date of maturity)
  • and the rate of interest that will be paid periodically until the loan matures
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7
Q

Governments issuing bonds is a way to promise to pay back loanable funds and can be on-sold. True or false?

A

true

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8
Q

What does interest on a bond depend on?

A

it’s maturity date and also the credit risk associated with the bond

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9
Q

Longer maturity dates are risky/riskier. Why?

A

risker
This is because the bond holder has to wait longer to be repaid and there is always the possibility they have to sell, perhaps at a reduced price

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10
Q

What is credit risk?

A

this is the probability that a borrower fails to pay some or even all of the interest or principal - the greater the risk, the greater the interest rate

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11
Q

What are shares?

A

These represent a claim to partial ownership in a firm which means that owning a share establishes a claim to the profits that the firm makes.

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12
Q

What is the purpose of shares?

A

To raise funds for capital

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13
Q

Can shares be on-sold to someone else?

A

yes

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14
Q

Compared to bonds, shares offer a ________ risk and a ________ reward

A

higher

higher

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15
Q

After shares are initially sold by the company to the public, they are traded among shareholders on stock exchangers on stock markets, true or false?

A

true

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16
Q

What are share prices determined by?

A

supply and demand (which depends on people’s perception of the corporation’s future profitability)

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17
Q

What is the share index?

an average of a group of _______ prices which provides an index of the overall level of share ______

A

an average of a group of share prices which provides an index of the overall level of share prices

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18
Q

What is a share price?

the _____ and _______ price reported _______

A

the opening and closing price reported daily

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19
Q

What is a dividend?

A

profits paid to share holders

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20
Q

What is the price-earning-ratio in terms of shares?

this is the price of the _______ per amount ________ earned per _________ - it is an indicator for future ________ or perhaps _____ or if _________ or ___________

A

this is the price of the share per amount corporation earned per share - it is an indicator for future performances or perhaps share or if undervalued or overvalued

21
Q

What are financial intermediaries?

A

these stand between borrowers and saver, thus enabling savers to indirectly provide funds to borrowers

22
Q

How do banks act as intermediaries?

A

they collect deposits from savers (who pay interest) and use these deposits to loan to borrowers (at a higher interest rate)
banks also play a role in providing a medium of exchange

23
Q

What are managed funds?

A

These can be intermediaries: an institution that puts your funds around for you to manage your risk and you get a good return

24
Q

In a closed economy, NX =

A

0

25
Q

In a closed economy, net foreign income =

A

0

26
Q

Give examples of net foreign income

A

us giving foreign aid, UK pensions coming into NZ

27
Q

If, in a closed economy, NX = 0 and NFO = 0, Y =

A

C + I + G

*not C + I + G + NX

28
Q

If Y = C + I + G then Y - C - G = I and Y - C - G = S, this implies that ______ = _______ where S = ________ and I = ___________

A

S = I

S = national savings
I = investment
29
Q

For a closed economy, savings must equal what? Why is this?

A

investment
because what is not being spent in the government or by the public is what is being saved and therefore it is not going into the economy

30
Q

What does investment mean in this sense?

A

this is the demand for loanable funds

31
Q

If interest rates increase what can change?

A

the supply and demand for loanable funds

32
Q

how do we define national savings?

__________ __________ income that remains after paying for __________ and __________ purchases

A

national disposable income that remains after paying for consumption and government purchases

33
Q

S = Y - C - G
if we let T denote tax revenue minus transfer payments, S = Y - C - G and therefore S = (Y - T - C) + (T - G).
What do these components mean?

A

Y - C - G is the private savings which is the gross national income that households have left after paying for consumption and taxes
(T-G) is the public savings which is tax revenue minus government purchases

34
Q

Savings can be determined by the

A

interest rate

35
Q

If the tax revenue is greater than the government purchases, there is a

A

surplus

36
Q

If the tax revenue is less than the government purchases, there is a

A

deficit

37
Q

If T>G, the government runs a budget surplus and so what happens to S?

A

S (ie. national savings) increases

38
Q

If T

A

S (ie. national savings) decreases

39
Q

Where does the supply of loanable funds come from?

A

savers

40
Q

Where does the demand of loanable funds come from?

A

investors

41
Q

What is the equilibrium price in the market for loanable funds called?

A

the real interest rate

42
Q

What is the real interest rate?

A

the inflation-corrected interest rate

43
Q

What are three fiscal policies that affect the market for loanable funds?

A
  • taxes and saving
  • taxes and investment
  • government budget deficits
44
Q

What happens to the supply of loanable funds when the interest rate increases?

A

it becomes more attractive to save and so people have more loanable funds and therefore S increases

45
Q

Who demands loanable funds?

What effect does a higher interest rate have of the demand for loanable funds?

A

firms wanting to start up, if there is a higher interest rate, it is more expensive to get loanable funds and so the demand decreases

46
Q

One of the fiscal policies that affect market for loanable funds is taxes and saving. What is the effect of the government decreasing taxes on saving?

A
  • reducing the tax on savings makes it more attractive to save because you pay less tax on the interest earned
  • this means that more people are going to save and so there is an increase in the supply of loanable funds
  • this causes the interest rate to fall and the quantity of loanable funds to increase
47
Q

One of the fiscal policies that affect market for loanable funds is taxes and investment. What is the effect of an investment tax credit?

A
  • if firms can show that they are doing investment they can get investment tax credit (which makes it more attractive to do investment)
  • this means that the demand for loanable funds increases because it has become more attractive to do investing
  • the demand curve shifts to the right which means that the interest rate increases and the quantity of loanable funds increases
48
Q

One of the fiscal policies that affect market for loanable funds is government budget deficits. What is the effect of crowding out due to government deficits?

A
  • the government budget deficit means T < G which means that savings in the economy are going down (public savings is negative) so the interest rate goes up as a result and quantity of loanable funds goes down
  • when governments run a budget deficit, they reduce national savings which reduces national saving, which results in a rising interest rate and falling investment
  • the decrease in investment that results from government borrowing is called crowding out
  • because investment is important for long-run economic growth, government budget deficits reduce the economy’s growth rate

OSB (26 decks)

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