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80 Cards in this Set

  • Front
  • Back
An excess of tax revenue over government spending:
budget surplus
The group of institutions in the economy that help to match one person’s saving with another person’s investment:
financial system
A certificate of indebtedness:
The tax revenue that the government has left after paying for its spending:
public saving
A shortfall of tax revenue from government spending:
budget deficit
Financial institutions through which savers can indirectly provide funds to borrowers:
financial intermediaries
The market in which those who want to save supply funds and those who want to borrow to invest demand funds:
market for loanable funds
A claim to partial ownership in a firm:
The total income in the economy that remains after paying for consumption and government purchases:
national saving (saving)
A decrease in investment that results from government borrowing:
crowding out
The income that households have left after paying for taxes and consumption:
private saving
An institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds:
mutual fund
Financial institutions through which savers can directly provide funds to borrowers:
financial markets
The accumulation of past budget deficits:
Government debt
What is the primary advantage of mutual funds?
They allow people w/ small amounts of money to diversify.
How do banks help create a medium of exchange?
By allowing people to write checks against their deposits.
What equation represents GDP in a closed economy?
Y = C + I + G
The sale of stock to raise money:
Equity financing
What happens when a country saves a larger portion of its GDP?
It will have more investment, and so it will also have more capital and higher productivity.
Why is it important for people who own stocks and bonds to diversify their holdings?
Because then they will only have a small stake in each asset, which reduces risk. Mutual funds make it easy to diversify by allowing a small investor to purchase parts of hundreds of different stocks & bonds.
In a closed economy, what does (T – G) represent?
Public saving
What increases the incentive for households to save at any given interest rate?
A tax decrease
What are the 3 most important stock exchanges in the U.S.?
1)New York Stock Exchange
2)American Stock Exchange
What is the role of the financial system?
To help match one person’s saving with another person’s investment.
List 3 government policies that affect saving and investment:
1)taxes and saving incentives
2)taxes and investment incentives
3)government budget deficits and surpluses
Who helps facilitate the purchases of goods and services?
What are the 2 types of financial institutions?
-stock market
-bond market
-mutual funds
What happens if the tax revenue of the federal government exceeds spending?
The government runs a budget surplus.
All income that people have chosen to save and lend out, rather than use for their own consumption:
Loanable funds
What represents public saving in a closed economy?
(T – G)
An item that people can easily use to engage in transactions:
A medium of exchange
What allows people w/ small amounts of money to diversify?
Mutual funds
Suppose the market for loanable funds is in equilibrium. Congress passes a law that gives a tax deduction to firms that use the internet to complete business transactions. What effect would this have on the market for loanable funds?
The demand for loanable funds would shift right, and the interest rates would increase.
Brea gives $1,000 to a firm that uses the money to buy a portfolio of stocks and bonds. Brea has:
Invested in a mutual fund.
For the economy as a whole, ____ equals ____.
saving equals investment
National saving is composed of:
private saving and public saving
The income people choose to save and lend out:
loanable funds
National saving last year was $1000, private saving was $750. This means that the government budget:
Ran a surplus of $250.

(1,000 - 750) = 250
If the market for loanable funds is not in equilibrium, what factor must change to bring it to equilibrium?
the interest rate
Large budget deficits will likely:
Decrease the nation's pool of saving.
Suppose the nominal interest rate is 9%. The rate of inflation is 6%. The real interest rate is:
(9 - 6)= 3%

(Nominal interest rate - Rate of inflation) = Real interest rate
The crowding-out effect occurs when a government deficit decreases:
In general, a bond will pay a higher rate of interest if:
It is a long-term bond.
What encourages investment in the market for loanable funds?
lower interest rates
Suppose the market rate of interest is 5%. The equilibrium rate of interest is 4.6%. We would expect:
The quantity of loanable funds demanded to be less than the quantity of loanable funds supplied, and interest rates to decrease.
Suppose that Megabux Corp. wants to add to its productive capacity by purchasing a new plant and equipment. Megabux management can finance those purchases by:
Issuing and selling new shares of stock and/or new corporate bonds.
GDP last year was $4000, taxes were $300, government spending was $200, and consumption was $3000. What was national saving?
The three characteristics of bonds that are most important are:
term, credit risk, and tax treatment.
The interest rate is the:
Price of a loan.
The equilibrium rate of interest is 6%. The market rate of interest is 7%. We would expect:
A surplus of loanable funds, and the interest rate to decrease.
What makes loanable funds more attractive to potential borrowers?
A decrease in interest rates.
Wht do firms demand credit?
They want to invest in capital projects.
National saving last year was $1,500, the government deficit was $500. What was private saving?
An increase in the supply of loanable funds will:
Decrease the equilibrium interest rate and increase investment.
What is the source of the supply of loanable funds?
What payment do lenders receive for extending credit?
interest income
The best definition of saving is:
Forgoing consumption and government spending.
Suppose the government surplus begins to decline. We would expect:
The supply of loanable funds to decrease.
What determines the price of a share of corporate stock?
People's perceptions of the corporation's future profitability
A correct comparison between bonds and common stock would be:
bonds are a debt of the corporation; stocks represent ownership.
In the diagram below, suppose the market for loanable funds is in equilibrium at point A. Congress eliminates the tax on interest income earned in savings accounts. We would expect the market for loanable funds to move to a new equilibrium at point:

The supply curve of loanable funds is:
Upward sloping reflecting the fact that savers need a higher rate of interest as an incentive to lend more.
In medieval Europe an important technological advance was the used of the padded horse collar for plowing. Once this idea was thought of, other people used it. What does this illustrate?
Illustrates that knowledge is a PUBLIC GOOD.
What would happen to the market for loanable funds if the government replaces a consumption tax with an income tax?
Interest rates would fall and investment would fall.
What identity shows that GDP is both total income and total expenditure?
Y = C + I + G + NX
A management professor discovers a way for corporate management to operate more efficiently. He publishes his findings in a journal. His findings are:
Common, but not proprietary, knowledge
Joe's income exceeds his expenditures. Joe is a:
Saver who supplies money to the financial system.
Compared to long-term bonds, short-term bonds generally have:
Less risk and thus pay a lower interest.
Bolivia had a smaller budget deficit in 2003 than in 2002. What effect did this budget deficit have on the market for loanable funds?
It reduced interest rates and raised investment.

What is the essential function of a country's financial system?
Matching up savers w/ investors.
Technology that is not widely used b/c it is known or controlled only by the company that discovered it:
Proprietary technology
If a production function has constant returns to scale, output can be doubled if:
All of the inputs double.
What would result from replacing the income tax with a consumption tax so that interest income was not taxed?
Investment would decrease.

How do you measure productivity?
Divide output by the # of hours worked.
What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?
The supply of lonable funds would shift right and investment would increase.

Why might people be concerned with the low savings rate in the U.S.?
Because investment must be financed by savings.
What will happen to the market for loanable funds if there is an increase in the tax rate on business profits?
It would make investment in capital less profitable, reducing the demand for loanable funds to invest in capital.
In what sense is the U.S. trade balance deficit beneficial to the U.S. economy?
It is associated with borrowing from foreigners, which helps finance U.S. investment.
What will happen to the market for loanable funds if there is an increase in real GDP?
Both the supply of and demand for loanable funds would increase.
What will happen to the market for loanable funds if there is an increase in the tax on interest income?
This would cause the supply of loanable funds to decrease.