Econ-201 The Financial System

Front 1

An excess of tax revenue over government spending:

Back 1

budget surplus

Front 2

The group of institutions in the economy that help to match one person’s saving with another person’s investment:

Back 2

financial system

Front 3

A certificate of indebtedness:

Back 3

bond

Front 4

The tax revenue that the government has left after paying for its spending:

Back 4

public saving

Front 5

A shortfall of tax revenue from government spending:

Back 5

budget deficit

Front 6

Financial institutions through which savers can indirectly provide funds to borrowers:

Back 6

financial intermediaries

Front 7

The market in which those who want to save supply funds and those who want to borrow to invest demand funds:

Back 7

market for loanable funds

Front 8

A claim to partial ownership in a firm:

Back 8

stock

Front 9

The total income in the economy that remains after paying for consumption and government purchases:

Back 9

national saving (saving)

Front 10

A decrease in investment that results from government borrowing:

Back 10

crowding out

Front 11

The income that households have left after paying for taxes and consumption:

Back 11

private saving

Front 12

An institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds:

Back 12

mutual fund

Front 13

Financial institutions through which savers can directly provide funds to borrowers:

Back 13

financial markets

Front 14

The accumulation of past budget deficits:

Back 14

Government debt

Front 15

What is the primary advantage of mutual funds?

Back 15

They allow people w/ small amounts of money to diversify.

Front 16

How do banks help create a medium of exchange?

Back 16

By allowing people to write checks against their deposits.

Front 17

What equation represents GDP in a closed economy?

Back 17

Y = C + I + G

Front 18

The sale of stock to raise money:

Back 18

Equity financing

Front 19

What happens when a country saves a larger portion of its GDP?

Back 19

It will have more investment, and so it will also have more capital and higher productivity.

Front 20

Why is it important for people who own stocks and bonds to diversify their holdings?

Back 20

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.

Front 21

In a closed economy, what does (T – G) represent?

Back 21

Public saving

Front 22

What increases the incentive for households to save at any given interest rate?

Back 22

A tax decrease

Front 23

What are the 3 most important stock exchanges in the U.S.?

Back 23

1)New York Stock Exchange
2)American Stock Exchange
3)NASDAQ

Front 24

What is the role of the financial system?

Back 24

To help match one person’s saving with another person’s investment.

Front 25

List 3 government policies that affect saving and investment:

Back 25

1)taxes and saving incentives
2)taxes and investment incentives
3)government budget deficits and surpluses

Front 26

Who helps facilitate the purchases of goods and services?

Back 26

Banks

Front 27

What are the 2 types of financial institutions?

Back 27

1) FINANCIAL MARKETS
-stock market
-bond market
2) FINANCIAL INTERMEDIARIES
-banks
-mutual funds

Front 28

What happens if the tax revenue of the federal government exceeds spending?

Back 28

The government runs a budget surplus.

Front 29

All income that people have chosen to save and lend out, rather than use for their own consumption:

Back 29

Loanable funds

Front 30

What represents public saving in a closed economy?

Back 30

(T – G)

Front 31

An item that people can easily use to engage in transactions:

Back 31

A medium of exchange

Front 32

What allows people w/ small amounts of money to diversify?

Back 32

Mutual funds

Front 33

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?

Back 33

The demand for loanable funds would shift right, and the interest rates would increase.

Front 34

Brea gives $1,000 to a firm that uses the money to buy a portfolio of stocks and bonds. Brea has:

Back 34

Invested in a mutual fund.

Front 35

For the economy as a whole, ____ equals ____.

Back 35

saving equals investment

Front 36

National saving is composed of:

Back 36

private saving and public saving

Front 37

The income people choose to save and lend out:

Back 37

loanable funds

Front 38

National saving last year was $1000, private saving was $750. This means that the government budget:

Back 38

Ran a surplus of $250.

(1,000 - 750) = 250

Front 39

If the market for loanable funds is not in equilibrium, what factor must change to bring it to equilibrium?

Back 39

the interest rate

Front 40

Large budget deficits will likely:

Back 40

Decrease the nation's pool of saving.

Front 41

Suppose the nominal interest rate is 9%. The rate of inflation is 6%. The real interest rate is:

Back 41

(9 - 6)= 3%

(Nominal interest rate - Rate of inflation) = Real interest rate

Front 42

The crowding-out effect occurs when a government deficit decreases:

Back 42

investment

Front 43

In general, a bond will pay a higher rate of interest if:

Back 43

It is a long-term bond.

Front 44

What encourages investment in the market for loanable funds?

Back 44

lower interest rates

Front 45

Suppose the market rate of interest is 5%. The equilibrium rate of interest is 4.6%. We would expect:

Back 45

The quantity of loanable funds demanded to be less than the quantity of loanable funds supplied, and interest rates to decrease.

Front 46

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:

Back 46

Issuing and selling new shares of stock and/or new corporate bonds.

Front 47

GDP last year was $4000, taxes were $300, government spending was $200, and consumption was $3000. What was national saving?

Back 47

$800

Front 48

The three characteristics of bonds that are most important are:

Back 48

term, credit risk, and tax treatment.

Front 49

The interest rate is the:

Back 49

Price of a loan.

Front 50

The equilibrium rate of interest is 6%. The market rate of interest is 7%. We would expect:

Back 50

A surplus of loanable funds, and the interest rate to decrease.

Front 51

What makes loanable funds more attractive to potential borrowers?

Back 51

A decrease in interest rates.

Front 52

Wht do firms demand credit?

Back 52

They want to invest in capital projects.

Front 53

National saving last year was $1,500, the government deficit was $500. What was private saving?

Back 53

$2,000

Front 54

An increase in the supply of loanable funds will:

Back 54

Decrease the equilibrium interest rate and increase investment.

Front 55

What is the source of the supply of loanable funds?

Back 55

savers

Front 56

What payment do lenders receive for extending credit?

Back 56

interest income

Front 57

The best definition of saving is:

Back 57

Forgoing consumption and government spending.

Front 58

Suppose the government surplus begins to decline. We would expect:

Back 58

The supply of loanable funds to decrease.

Front 59

What determines the price of a share of corporate stock?

Back 59

People's perceptions of the corporation's future profitability

Front 60

A correct comparison between bonds and common stock would be:

Back 60

bonds are a debt of the corporation; stocks represent ownership.

Front 61

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:












-

Back 61

D

Front 62

The supply curve of loanable funds is:

Back 62

Upward sloping reflecting the fact that savers need a higher rate of interest as an incentive to lend more.

Front 63

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?

Back 63

Illustrates that knowledge is a PUBLIC GOOD.

Front 64

What would happen to the market for loanable funds if the government replaces a consumption tax with an income tax?

Back 64

Interest rates would fall and investment would fall.

Front 65

What identity shows that GDP is both total income and total expenditure?

Back 65

Y = C + I + G + NX

Front 66

A management professor discovers a way for corporate management to operate more efficiently. He publishes his findings in a journal. His findings are:

Back 66

Common, but not proprietary, knowledge

Front 67

Joe's income exceeds his expenditures. Joe is a:

Back 67

Saver who supplies money to the financial system.

Front 68

Compared to long-term bonds, short-term bonds generally have:

Back 68

Less risk and thus pay a lower interest.

Front 69

Bolivia had a smaller budget deficit in 2003 than in 2002. What effect did this budget deficit have on the market for loanable funds?

Back 69

It reduced interest rates and raised investment.




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Front 70

What is the essential function of a country's financial system?

Back 70

Matching up savers w/ investors.

Front 71

Technology that is not widely used b/c it is known or controlled only by the company that discovered it:

Back 71

Proprietary technology

Front 72

If a production function has constant returns to scale, output can be doubled if:

Back 72

All of the inputs double.

Front 73

What would result from replacing the income tax with a consumption tax so that interest income was not taxed?

Back 73

Investment would decrease.





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Front 74

How do you measure productivity?

Back 74

Divide output by the # of hours worked.

Front 75

What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?

Back 75

The supply of lonable funds would shift right and investment would increase.





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Front 76

Why might people be concerned with the low savings rate in the U.S.?

Back 76

Because investment must be financed by savings.

Front 77

What will happen to the market for loanable funds if there is an increase in the tax rate on business profits?

Back 77

It would make investment in capital less profitable, reducing the demand for loanable funds to invest in capital.

Front 78

In what sense is the U.S. trade balance deficit beneficial to the U.S. economy?

Back 78

It is associated with borrowing from foreigners, which helps finance U.S. investment.

Front 79

What will happen to the market for loanable funds if there is an increase in real GDP?

Back 79

Both the supply of and demand for loanable funds would increase.

Front 80

What will happen to the market for loanable funds if there is an increase in the tax on interest income?

Back 80

This would cause the supply of loanable funds to decrease.