Week four learning Flashcards
What is the role of the financial system?
The financial system helps to match savers with borrowers, moving the economy’s scarce resources from savers to borrowers and coordinating their actions.
What are the two main components of the financial system?
Financial markets (where savers provide funds directly to borrowers) and financial intermediaries (where savers provide funds indirectly through institutions like banks and managed funds).
What is a bond?
A bond is a certificate of indebtedness that specifies the borrower’s obligations to the bondholder. It includes terms like maturity, credit risk, and tax treatment
What is the difference between bonds and shares (stocks)?
Bonds are a form of debt where you are a creditor to the company, while shares represent partial ownership in the firm with potential for higher returns and risk.
What is the expected value
calculated as EV=PA×A+PB×B+PC×C. It measures the riskiness
How do financial intermediaries like banks and managed funds operate?
Banks take deposits from savers and make loans to borrowers, profiting from the difference in interest rates. Managed funds pool investors’ money to buy a portfolio of shares and bonds, diversifying risk.
What is national saving and how is it calculated?
National saving (S) is the total income in the economy after paying for consumption and government purchases. It is calculated as S=Y−C−G.
How is public saving and private saving defined?
Public saving is the amount of tax revenue left after government spending (T−G), while private saving is the amount of income left after taxes and consumption (Y−T−C)
Given GDP = $19 trillion, C = $13 trillion, G = $2.5 trillion, and a budget deficit of $1.2 trillion, calculate:
Public saving
Taxes
Private saving
National saving
Public saving = T−G=−1.2 trillion
Taxes = T=1.3 trillion
Private saving = Y−T−C=19−1.3−13=4.7 trillion
National saving = S=3.5 trillion
How do financial markets coordinate saving and investment?
Financial markets coordinate saving and investment through the market for loanable funds, where the supply of funds from savers meets the demand for funds from borrowers.
What is the effect of taxes on saving?
Taxes on interest income reduce the incentive to save. A decrease in taxes increases the incentive to save, shifting the supply of loanable funds to the right, decreasing the equilibrium interest rate.
What happens when there is an investment tax credit?
An investment tax credit increases the incentive to borrow, shifting the demand for loanable funds to the right, resulting in a higher interest rate and a greater quantity of funds saved.
What is crowding out in the context of government budgets?
Crowding out occurs when government borrowing reduces the supply of loanable funds available for private investment, leading to higher interest rates and reduced investment by households and firms.
What are the effects of a budget deficit on the supply of loanable funds?
A budget deficit decreases the supply of loanable funds, shifting the supply curve to the left, increasing the equilibrium interest rate, and reducing the equilibrium quantity of loanable funds.
