week 18

Question 1

what is saving

Answer 1

current income - current needs

Question 2

what is the saving rate

Answer 2

saving / income

Question 3

what is wealth

Answer 3

value of assets - liabilities

Question 4

what is flow value

Answer 4

dynamic movement of goods, services or money over time and measured as a rate
eg spending and wages

Question 5

what is a stock value

Answer 5

defined at a specific point in time and is static
eg wealth, debt and investment

Question 6

what are capital gains

Answer 6

increase the value of existing assets
higher value of stock
higher housing value
selling price > purchase price

Question 7

what are capital losses

Answer 7

decreases value of existing assets
selling an asset lower than purchase price

Question 8

how do you calculate change in wealth

Answer 8

saving + capital gains - capital losses

Question 9

what are the types of household saving

Answer 9

life-cycle saving
precautionary saving
bequest saving
wealth accumulation
consumption smoothing

Question 10

what is life-cycle saving

Answer 10

meet long term objectives eg retirement, house buying, university

Question 11

what is precautionary saving

Answer 11

protection against setbacks and income fluctuations eg job loss

Question 12

what is bequest saving

Answer 12

leave an inheritance, mainly higher income groups

Question 13

what is wealth accumulation

Answer 13

used to purchase assets such as a home or business, generate income or appreciate in value overtime

Question 14

what is consumption smoothing

Answer 14

save to smooth out consumption over their lifetime, save during periods of high income and consume in periods of low income

Question 15

what is real interest rate

Answer 15

nominal interest rate - rate of inflation

Question 16

what can decrease savings rate

Answer 16

mortgages
confidence in prosperous future
increasing stocks value
low interest rates

Question 17

how do you calculate national savings

Answer 17

assume NX = 0
S = Y - C - G
national savings = current income - spending on current needs
Sprivate + Spublic = (Y-T-C) + (T-G)

Question 18

what is private saving

Answer 18

household + business saving
S = Y - T - C

Question 19

what is business savings

Answer 19

revenues - operating costs - dividends to shareholders

Question 20

what is public saving

Answer 20

amount of the public sectors income that is not spent on current needs
S = T - G

Question 21

what is a balanced budget

Answer 21

occurs when gov spending = net tax receipts

Question 22

what is a gov budget surplus

Answer 22

excess of gov net tax collections over spending
T-G

Question 23

what is a gov budget deficit

Answer 23

excess of gov spending over net tax collections
G-T

Question 24

what is investment

Answer 24

creation of new capital goods and housing
necessary to increase average labour productivity

Question 25

what is the investment decision

Answer 25

two important costs - price of capital goods and real interest rates
VMP is the benefit

Question 26

what is rate of return

Answer 26

value of marginal product as a percentage of purchase price
VMP/PK
if VMP/PK > r, then investment is profitable

Question 27

what are financial intermediaries

Answer 27

firms that extend credit to borrowers using funds raised from savers

Question 28

what are banking systems

Answer 28

help savers by evaluating quality of potential borrowers, direct savings towards higher return options

Question 29

what are bonds

Answer 29

a legal promise to pay someone a debt, usually including both the principle amount and regular interest payments

Question 30

what is the principal amount

Answer 30

amount originally lent

Question 31

what is a coupon rate

Answer 31

interest rate promised when the bond is issued

Question 32

what are coupon payments

Answer 32

regular interest payments made to the bondholder

Question 33

how do bond markets ensure savings are most productive

Answer 33

gather info about prospective borrowers
help savers to share risks of lending
companies considering a new issue of shares of bonds know recent performance and plans for future will be carefully studied by financial investors

Question 34

what is diversification

Answer 34

spreading ones wealth over a variety of investments to reduce risk

Question 35

what is supply of savings

Answer 35

amount of savings that would occur at each possible real interest rate

Question 36

what is demand for investment

Answer 36

amount of savings borrowed at each possible real interest rate

Question 37

how do financial markets adjust to technological improvement

Answer 37

raises marginal productivity of capital
increases demand for investment

Question 38

how do government budget increases affect financial markets

Answer 38

gov budget deficit increases
reduces national savings
higher interest rate
private investment is crowded out

Question 39

how do you increase national saving

Answer 39

policymakers know the benefits of increased national saving rates
reducing budget deficit would increase national saving
increase incentives for households
higher national saving rate leads to greater investment in new capital goods and a higher standard of living

Question 40

what is austerity

Answer 40

fiscal policy approach that involves reducing gov spending and/or increasing taxes in order to reduce budget deficits and debt

Question 41

what is stimulus

Answer 41

fiscal and monetary policy to elicit an economic response from the private sector