Saving, Investment, And The Financial System Flashcards
What is the financial system
Financial systems are the group of institutions in the economy that help to match one person’s savings with another person’s investment.
Saving and investment are key ingredients to long-economic growth.
A. True
B. False
True
When a country saves a large portion of its GDP, more resources are available for investment in capital, and higher capital raises a country’s productivity and living standard.
A. True
B. False
True
Savers supply their money to the financial system with the expectation that they will get it back with interest at a later date.
A. True
B. False
True
Borrowers demand money from the financial system with the knowledge that they will be required to pay back with interest at a later date.
A. True
B. False
True
What are financial markets
Financial markets are financial institutions through which savers can directly provide funds to borrowers.
The two most important financial markets in the economy are the bond market and the stock market.
A. True
B. False
True
What is a Bond
Bond is a certificate of indebtness that specifies the obligation of the borrower to the holder of the Bond.
A bond is an IOU
A. True
B. False
True
What are the two characteristics of a Bond
- The bond’s term
- The bond’s credit risk
What is the Bond’s term
It is the length of time until the bond matures. All else equal, long-term bonds pay higher rates of interest than short-term bonds.
What is the Bond’s credit risk
It is the probability that the borrower will fail to pay some of the interest or principal. All else equal, the more risky a bond is, the higher its interest rate.
What is a Stock
Stock is a claim to partial ownership in a firm
What is an equity finance
Equity finance is the sale of stock to raise money.
The prices at which they share trade on stock exchanges are determined by the supply and demand for the stock.
A. True
B. False
True
The price of stock generally reflects the perception of a company’s future profitability.
A. True
B. False
True
What are financial intermediaries
Financial intermediaries are financial institutions through which savers indirectly provide funds to borrowers.
The term intermediary reflects the role of the institutions in standing between savers and borrowers.
A. True
B. False
True
What is a debt finance
A debt finance is the sale of bonds to raise money
What is a mutual fund
Mutual fund is an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds.
What is Accounting
Accounting is the process of recording financial transactions pertaining to a business.
What is National Saving
National saving is the total income in the economy that remains after paying for consumption and government purchases.
National saving equals private saving and public saving.
A. True
B. False
True
National saving (S)= Y-C-G=I
A. True
B. False
True
What is Private saving
Private saving is the income that households have left after paying for taxes and consumption.
Private saving formula is Y-C-T
A. True
B. False
True
What is Public saving
Public saving is the tax revenue that the government has left after paying for its spending.
Public saving formula is T-G
A. True
B. False
True
What is Budget surplus
Budget surplus is the excess of tax revenue over government spending.
Budget surplus is T>G
A. True
B. False
True
What is a budget deficit
Budget deficit is a shortfall of tax revenue from government spending.
Budget deficit is T<G
A. True
B. False
True
With a government budget deficit , public saving is begativr, and the public sector is thus dis-solving.
A. True
B. False
True
What is the market for loanable funds
It is the market in which those save supply funds and those who want to borrow to invest demand funds.
Saving is the source of the supply for loanble funds.
A. True
B. False
True
Investment is the source of the demand for loanable funds.
A. True
B. False
True
Net exports always equals 0.
A. True
B. False
True
A higher saving rate could lead to a higher rate of growth of GDP.
A. True
B. False
True
What is a government debt
Government debt is the sum of past budget deficits and surpluses.
What is crowding out
Crowding out is a decrease in investment that results from government expenditure and borrowing.
What is a vicious circle
It is the cycle that results when deficits reduce the supply of loanable funds, increase interest rates, discourage investment, and result in slower economic growth.
