Midterm Topic 5

Question 1

wealth

Answer 1

the difference between assets and liabilities

assets - liabilities = net worth

Question 2

asset

Answer 2

something that is owned and of value

Question 3

real asset

Answer 3

physical asset. (includes real estate, antiques, stamps, physical stock of capital, and natural resources)

Question 4

financial asset

Answer 4

a claim on someone’s income. financial assets include stocks, bonds, savings accounts, loans and currencies.

Question 5

liability

Answer 5

the amount that is owned to someone else. liabilities include all of the financial assets

Question 6

Sources of wealth

Answer 6

exogenous shocks: luck, bequest, etc.

endogenous changes: saving and value changes

Question 7

main sources of wealth accumulation

Answer 7

saving and interest

Question 8

saving

Answer 8

saving = current income - current spending
= change in wealth
= change in assets - change in liabilities

Question 9

nominal interest rate

Answer 9

the rate of return that a borrower offers a lender (i)

one measure that allows us to compare different asset and liability alternatives, a measure to evaluate the relative change in the value of an asset / liability over time.

Question 10

real interest rate

Answer 10

the rate at which the real value of an asset changes over time (r)

used because we want to distinguish between value increases b/c of higher demands for an asset and price illusions / higher price levels.

Question 11

Fisher equation

Answer 11

1+i = (1+r) (1+ infl. rate)
states the relation ship b/w real interest rates adn nominal rates adjusted for inflation
i = r + inflation rate

Question 12

foreign asset

Answer 12

claims to foreigners by residents

Question 13

foreign liability

Answer 13

claims to residents by foreigners

Question 14

wealth of a nation that is a closed economy vs. open economy

Answer 14

closed economy: wealth of a nation depends only on its physical assets. saving is reflected only by changes in its real assets. (domestic financial assets and liabilities cancel each other out).

open economy: depends on its physical assets and its foreign assets and foreign liabilities. national saving is determined by changes in physical domestic assets, foreign real assets, and foreign liabilities.

Question 15

national saving

Answer 15

S = S (private) + S (government)

sum of private and public saving.

Question 16

NFA

Answer 16

net foreign assets: change in foreign assets minus change in foreign liabilities

Question 17

S > I

Answer 17

there is an excess in domestic savings. implies that nation either acquires more foreign assets (change in FA>0) or decreases foreign liabilities (change in FL <0).
change in FA > change in FL

nation is a net lender

Question 18

S<i></i>

Answer 18

there is a shortage in domestic savings. implies that the nation either reduces foreign assets or increases foreign liabilities.
change in FA < change in FL

nation is a net borrower

Question 19

Current account balance

Answer 19

a record and the sum of net exports, net factor income, and net unilateral transfers.

CA = NX + NI + NUT
(= S - I = change in FA - change in FL) but the definition excludes these things.

Question 20

current account surplus

Answer 20

CA >0,

1. more domestic saving than investment. (S>I)
2. nation absorbs less of own produced goods (net exports positive), less of own factors of production (net income positive) and/or absorbs more of budgets abroad (net transfers in)
3. foreign assets increase relatively more than its foreign liabilities

Nation is a net lender

Question 21

current account deficit

Answer 21

CA<0

1. less domestic saving than investment (S<i></i>

Question 22

interest

Answer 22

return on investments and is described by nominal and real interest rates

Question 23

private saving

Answer 23

results from saving behavior of households and corporations

Question 24

government saving

Answer 24

surplus / deficit of government budget