Saving, Investment, and the Financial System

Question 1

The financial system is

Answer 1

the group of institutions that helps match the saving of one person with the investment of another.

Question 2

Financial institutions are

Answer 2

institutions through which savers can directly provide funds to borrowers.
* Financial markets (bond/stock markets - directly)
* Financial intermediaries (banks - indirectly)

Question 3

Private saving is

Answer 3

• Income that households have left after paying for taxes and consumption
• Private saving = Y - T - C

Question 4

Public saving is

Answer 4

• Tax revenue that the government has left after paying for its spending
• Public saving =T−G

Question 5

National saving is

Answer 5

• The sum of private saving and public saving
• Public saving = Y - C - G
• It equals to the national income that is NOT used for consumption or government purchases

Question 6

In the case of closed economy, investment equals to

Answer 6

I = S (national saving) = Y - C - G

Question 7

Budget surplus is

Answer 7

• An excess of tax revenue over government spending
• Budget surplus = Public saving = T - G

Question 8

Budget deficit is

Answer 8

• A shortfall of tax revenue from government spending
• Budget deficit = G - T

Question 9

The Market for Loanable Funds

Answer 9

Assume: only one financial market
* All savers deposit their saving in this market.
* All borrowers take out loans from this
market.
There is one interest rate, which is both the
return to saving and the cost of borrowing.

Question 10

If public saving is possitive, government runs a budget surplus.

Answer 10

• Add to national saving and the supply of loanable funds

Question 11

If public saving is negative, government runs a budget deficit.

Answer 11

• Reduces the national saving and the supply of loanable funds

Question 12

If the demand for loanable funds shifts to the left, then the equilibrium interest rate
a. and quantity of loanable funds rise.
b. and quantity of loanable funds fall.
c. rises and the quantity of loanable funds falls.
d. falls and the quantity of loanable funds rises.

Answer 12

b

Question 13

If the supply for loanable funds shifts to the left, then the equilibrium interest rate
a. and quantity of loanable funds rise.
b. and quantity of loanable funds fall.
c. rises and the quantity of loanable funds falls.
d. falls and the quantity of loanable funds rises.

Answer 13

c

Question 14

Assume the government starts with a balanced budget and then, because of an increase in government spending (and/or decrease in taxes), it starts running a budget deficit:

Answer 14

the supply curve will shift to the left - the equilibrium interest rate rises and the equilibrium quantity of loanable fund decrease - investment also decreases too.

Question 15

The effects of investment incentives

Answer 15

The demand curve shifts to the right