Topic 7_ Saving Investment and the Financial System

Question 1

Financial systems

Answer 1

channels funds from savers to borrowers and vice versa

Question 2

two financial insitution in economy

Answer 2

Financial Markets
Financial intermediaries

Question 3

Financial Markets

Answer 3

markets where financial securities such as stock and bonds are bought/sold

firms raise funds by selling financial securities DIRECTLY to savers

Question 4

Financial security defintion

Answer 4

document stating the terms under which funds go from buyer of security (lender)to the seller (borrower)

Question 5

2 types of financial markets

Answer 5

stock market
bond market

Question 6

stock

Answer 6

stock is a financial security that represent you partially owning that firm AND own a SHARE of the firm profits

Firms pay shareholders DIVIDENDS (a part of its profits)

Question 7

what is a stock

Answer 7

you own a piece of the company, you get paid dividend

Question 8

if price of stock increases how can you make profit

Answer 8

by selling that stock, this is called

FINANCIAL CAPITAL GAINS

Question 9

Financial Capital Gains
Financial Capital Loss

Answer 9

Occurs when stock gains value and you sell
occurs when the stock loses value and cant sell

Question 10

Financial capital is not included in

Answer 10

INVESTMENT

Question 11

Why dont we use financial capital when we measure gdp?

Answer 11

Because the ownership of financial capital can change at any time

Question 12

Bond

Answer 12

financial security promising to repay a fixed amount of funds in the future and also an interest rate

this is a LOAN from a household to either govt or a firm

Question 13

The data of maturity, what happens here?

Answer 13

When the principal or amount borrowed is to be repaid

Question 14

how long can bond maturity be

Answer 14

couple months or years

Question 15

what is the most secure bond

Answer 15

govt treasury bill

Question 16

what is the most secure bond

Answer 16

govt treasury bill

Question 17

financial intermediaries

Answer 17

firms that borrow funds from savers and lend them to borrowers

EX:
-Banks (Accept deposits from savers and make loans)
-mtf

Question 18

how do banks mak emoney

Answer 18

they charge a higher interest late on loans they give out, then what they pay to consumers who save in their own bank

bank might pay 2% on savings account, but charge 6% on loans

Question 19

Mutual Funds

Answer 19

sell shares to savers then use the funds to buy financial securities (a portfolio of stock and bonds)

shareholders who invest in MF take on the risk of losing their money

MF charges 0.5-0.3 of assets fee

Question 20

3 services for savers and borrowes

Answer 20

Risk Sharing: diversiy portfolio; by allowing savers to spread their money amoong many financial assets, savers can reduce risk

Liquidity: ability to sell their financial asset and convert them into cash

Information: providing savers with facts about borrowers and expectations about reutnrs on financial securities

Question 21

4 people in financial system

Answer 21

financial markets
savers
financial intermediaries
borrowers

Question 22

What is the relationship between GDP and components

Answer 22

GDP (Y)= C+I+G+NX

Consumption
Investment
Govt purchases (local /federal/provicnical)
Net Exports

Question 23

What is investment in a closed economy equal to

Answer 23

Equal to innvestmet+ consuption and govt spending

investment is the purchase of new capital

Y= C +I+G

Question 24

What dont we incldue in investment

Answer 24

Financial CAPITAL!

Investmenti s the purchase of new capital!!!!!

Question 25

Private Savings

Answer 25

all household incomes that is not spent

Sprivate= Y +TR-C-T

What you earn +Transfer payment- Consumption-Taxes

Question 26

Public Savings

Answer 26

Tax revenue- govt purchases-Transfer payments to household

S=T-G- TR

Question 26

what do households do with private savings

Answer 26

buy bonds or stocks

buy mf share

deposit in saving or checkingP

Question 27

Assume in a closed economy THERE ARE NO NET EXPORTS

Y= C + I + G

iso for investment
I= Y-C-G

THIS IS THE SAME AS

S= Y- C -G

SOOOOO…

Answer 27

In a clsoed economy total savings = total investment

S=I

Question 28

When T=G +TR

Answer 28

A balanced pubdget where public savings equals to Zero

tax=govt spending+transfer payments

Question 29

When T> G + TR

Answer 29

a budget surplus. where public savings is positive

Question 30

When T< G + TR

Answer 30

a budget deficit, where public savings is negative

Question 31

How can public saving be negative/ How can there be a budget deficit

Answer 31

when what is collected from taxes is LOWER then what they need

the govt must sell bonds to borrow money needed to fund the spending not paid for with taxes

Question 32

Why is a budget deficit bad

Answer 32

this makes sthe eocnomy not grow faster, because this DECREASES investments

decreases capital per worker, decrease econ growth

Question 33

Why is budget surplusgood

Answer 33

promotes investment, promotes growth

Question 34

do consumers help the economy more by saving the full proceeds of the tax cut or by spending it

Answer 34

savings help the eocnomy in the long run/OR WHEN EXPANSION IS HAPPENING

savings help the eocnomy in a recession!!!!

Question 35

Investment is always equal to ?

Answer 35

SAVINGS!!! in a closed economy!

Question 36

what are bonds
waht are stocks

Answer 36

debt
equity

Question 37

what is a poor functioning financial system

Answer 37

decline in saving and investment

lower eocn growth

lower stand of living

Question 38

rearrange the closed economy gdp formula

Answer 38

Y = I + G+ C

I=Y-C-G

Question 39

WHY IS A GOVERNMENT BUDGET DEFICIT BAD

Answer 39

BECAUSE. THIS MEANS THERE IS NEGATIVE PUBLIC SAVINGS, AND THAT THE TOTAL AMOUNT OF SAVING IS LOW

THIS MEANS THAT OCMPANIES THAT BORROW MONEY FROM BANKS ARE UNABELT O DO THAT BECAUSE THERE ARE LESS SAVINGS

Question 40

Public saving formula

Answer 40

sPUBLIC= Taxes- Govt spending- Transfer Payments

Question 41

Private Savings formula

Answer 41

Sprive= Y- Consumption+Transfer Payments-Taxes

Question 42

Taxes formula (in a balanced budget)

Answer 42

Government spending + Transfer payments