Third Set

Question 1

Bond

Answer 1

certificate of indebtedness
* date of maturity, when the loan will be repaid
*rate of interest
*principal - amount borrowed

Question 2

Borrowing from the public

Answer 2

Used by large corporations, the federal government or state and local governments

Question 3

Term

Answer 3

length of time until maturity

Question 4

Credit Risk

Answer 4

probability of default
*probability that the borrower will fail to pay some of the interest or principal
*higher interest rates for higher probability of default
*U.S government bonds tend to pay low interest rates
*Junk bonds, very high interest rtes: issued by financially shaky corprtins

Question 5

Taxable treatment

Answer 5

interest on most bonds is taxable income

Question 6

Municipal bonds

Answer 6

issued by state + local governments
* owners are not required to pay federal income tax on the interst income
*lower interest rate

Question 7

The stock market

Answer 7

1. stock
2. organized stock exchanges
3. equity finance
4. stock index

Question 8

Stock

Answer 8

claim to partial ownership in a firm; a claim to the profits that a firm makes

Question 9

organized stock exchange

Answer 9

stock prices: demand and supply

Question 10

Equity finance

Answer 10

sale of stock to raise money

Question 11

Stock index

Answer 11

average of a group of stock prices

Question 12

Financial intermediaries

Answer 12

*savers can indirectly provide funds to borrows
*banks
*mutual funds

Question 13

Banks

Answer 13

1. take in deposits from savers
   2.make loans to borrows
2. facilitate purchasing of goods and services

Question 14

Banks: take in deposits from savers

Answer 14

banks pay interest

Question 15

Bank: make loans to borrows

Answer 15

banks charge interest

Question 16

banks: facilitate purchasing of goods and services

Answer 16

checks: medium of exchange

Question 17

Mutual funds

Answer 17

-institution that sells shares to the public
-uses the proceeds to buy a portfolio of stocks and bonds
-advantages: diversification, professional money managers

Question 18

Rules of national income accounting

Answer 18

Important identities

Question 19

R.O.N.I.A: identity

Answer 19

an equation that must be true because of the way the variables in the equation are defined
-clarify how different variables are related to one another

Question 20

Gross Domestic Product (GDP,Y)

Answer 20

total income = total expenditure

Question 21

Y=C+I+G+NX

Answer 21

Y= gross domestic product, gdp
c= consumption
i= investment
g= government purchases
NX= net exports

Question 22

Closed Economy

Answer 22

-Doesn’t interact with other economies
-NX = 0

Question 23

Open economy

Answer 23

-interacts with other economies
- nx not equal to zero

Question 24

Assume to closed economy: NX=0

Answer 24

Y = C+I+G

Question 25

National Saving (saving), s

Answer 25

total income in the economy that remains after paying for consumption and government purchases Y-C-G=I S= Y-C-G S=I

Question 26

T = taxes minus transfer payments

Answer 26

S=Y-C-G S=(Y-T-C)+(T-G)

Question 27

Private Saving

Answer 27

Y-T-C: Income that households have left after paying for taxes and consumption

Question 28

Public saving, T-G

Answer 28

Tax revenue that the government has left after paying for its spending

Question 29

Budget Surplus: T-G> 0

Answer 29

Excess of tax revenue over governmentspending

Question 30

Budget deficit: T-G< 0

Answer 30

shortfall of tax revenue from governmentspending

Question 31

Accounting identity: S=I

Answer 31

Saving = investment - for the economy as a whole -one person's savings can finance another person's investment

Question 32

Market for loanable funds

Answer 32

Market -those who want to save supply funds -those who want to borrow to invest demand funds -one interest rate *return to saving *cost of borrowing Assumption: Single financial market

Question 33

Source of the supply of loanable funds

Answer 33

Saving

Question 34

Source of the demand for loanable funds

Answer 34

investment

Question 35

Price of a loan = real interest rate

Answer 35

*borrowers pay for a loan *lenders receive on their saving

Question 36

As interest rate rises...

Answer 36

*quantity demanded declines *quantity supplied increases

Question 37

Demand curve

Answer 37

slopes downward

Question 38

Supply curve

Answer 38

slopes upward

Question 39

Government policies...

Answer 39

can affect the economy's saving and investment i.e, saving incentives, investment incentives, government budget deficits and surpluses

Question 40

Saving incentives

Answer 40

affect supply of loanable funds -increase in supply *supply curve shifts right -new equilibrium *lower interest rate *higher quantity of loanable funds -greater investment

Question 41

Investment tax credit

Answer 41

affect demand for loanable funds increase in demand *demand curve shifts right -new equilibrium *higher interest rate *higher quantity of loanable funds *greater saving

Question 42

Crowding out

Answer 42

Decrease in investment

Question 43

Government budget deficit

Answer 43

interest rate rises; investment falls

Question 44

Government -budget surplus

Answer 44

increase supply of loanable funds reduce interest rate stimulates investment