Econ Chp. 26

Front 1

Financial System

Back 1

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

Front 2

When a country saves a large portion of its GDP more resources are available for ________ and higher _______ raises a country's productivity and living standard

Back 2

Investment in capital

capital

Front 3

Financial Institutions are grouped into 2 main categories

Back 3

Financial Markets

Financial intermediaries

Front 4

Financial markets

Back 4

Financial institutions through which savers can directly provide funds to borrowers

Front 5

2 most important financial markets in the U.S. are the:

Back 5

1. Bond Market

2. Stock Market

Front 6

Bond

Back 6

Certifies a indetedness

an "IOU" that specifies that date that it must be repaid by called the date of maturity, along with the rate of interest that will be paid periodically until the loan matures.

Principal is the initial amount borrowed

Front 7

Bonds differ according to three significant charactersitics

Back 7

<b>1. Term</b>
-length of time until the bond matures--Longer term bonds are riskier and usually pay a higher interest rate as a result

<b>2. Credit Risk</b>
probability that the borrower will fail to pay some of the interest or principal. Failure to pay is called a default. One way to default is to declare bankruptcy.

<b>3. Tax Treatment</b>
The interest on most bonds i taxable income so taht the bond owner has to pay a portion of the interest in income taxes. Municipal bonds however aren't taxable and as a result have a lower interest rate

Front 8

Stock

Back 8

a claim to partial ownership in a firm and therefore a claim to the profits that the firm makes.

Front 9

The sale of stock to raise money is called

Back 9

EQUITY finance

Front 10

Sale of bonds is called

Back 10

DEBT finance

Front 11

Which offers higher risks & as a result higher returns? Stocks or Bonds? Why?

Back 11

Stocks

Because if Intel runs into financial difficulty the bondholders are paid what they are due before the stockholders get anything. At the same time however if Intel is wildly successful then the bondowners only make the interest owed on the Bond while the Stock holders receive profit in proportion to their ownership in the company

Front 12

After a corporation issues stock by selling shares to the public, these shares trade among stockholders on organized stock exchanges. In these transactions, the corporation itself receives no money when its stock changes hands.

Back 12

True

Front 13

What is the most important stock exchange in the U.S.?

Back 13

the New ork Stock Exchange,

The American Stock Exchange

The National Association of Securities Dealers Automated Quotation System (Nasdaq)

Front 14

The prices at which shares trade on stock exchanges are determined by the supply and demand for the stock in these companies

Back 14

True

Front 15

Stock Index

Back 15

available to monitor the overall level of stock prices.

A computed average of a group of stock prices

most famous is the Dow Jones Industrial Average--since 1896. Based now on the prices of the stocks of thirty major U.S. companies

Front 16

Stock prices reflect what?

Back 16

Anticipation of future profitability

stock drops if anticipation=losses/no growth

stock rises anticipation=more profitability

Front 17

Financial Intermediaries

Back 17

Financial Institutions through which savers can INDIRECTLY provide funds to borrowers

2 most important financial intermediaries
-Banks
-Mutual Funds

Front 18

Banks

Back 18

Help create a special asset that people can use as a medium of exchange (checks, debit card)

Medium of exchange is an item that people can easily use to engage in transactions.

Front 19

Mutual Funds

Back 19

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

Index funds buy all the stocks in a given stock index and perform somewhat better on average than mutual funds that take advantage of active trading by professional money managers

Front 20

Review page 579--Stock Facts

Back 20

Good to know!

Front 21

Financial Institutions all serve the Same Goal

Back 21

Directing the resources of savers into the hands of borrowers

Front 22

Savings and investment are important determinants of long-run growth in GDP and living standards

Back 22

true

Front 23

GDP =

Back 23

Y = C + I + G + NX

Total income = Total Expenditures

Simplifying assumption no NX so:
Y = C + I + G
That is, Each unit of output sold in a closed economy is consumed invested or bought by the Government

Front 24

I = Y - C - G

rewritten from Y = C + I + G

Back 24

Y - C - G

is the total income in the economy that remains after paying for consumption and government purchases. This amount is called <b>National Savings or just Savings "S"</b>

THUS

Investment =(National) Savings

Front 25

Public Savings

Back 25

The Tax revenue that the government has left AFTER paying for its spending

Front 26

Private Savings

Back 26

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

Front 27

National Savings can be written 1 of 2 ways

Back 27

I = S = (Y - C - G)

The two Ts in the second equation cancel each other out and separate the identity into 2 pieces

S = (Y - T - C) + (T-G)

1. (Y-T-C) Private Savings
2. (T-G) Public Savings

Front 28

budget Surplus

Back 28

An excess of tax revenue over government spending

Front 29

Budget Deficit

Back 29

A shortfall of tax revenue from government spending

Front 30

For the economy as a whole S must be equal to what?

Back 30

I

Investments

Front 31

Investing/ment

Back 31

refers to the purchase of new capital such as equipment or buildings

Front 32

S = I for BOTH the economy and every individual within the economy?

Back 32

False!

S=I for the economy but doesn't have to necessarily be true for individuals. Banks and other financial institutions make individual differences between S & I possible

Front 33

Market for Loanable Funds

Back 33

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

Governed by S & D

Front 34

Where does the supply of loanable funds come from?

Back 34

saving is the source of the supply of loanable funds

Front 35

Investment is the source of the demand for loanable funds

Back 35

true

Front 36

Interest rate is the price of a loan

Back 36

t

Front 37

Crowding Out

Back 37

A decrease in investment that results from government borrowing

Front 38

When the government reduces national savings (Y - C - G) by running a budget deficit the interest rates and investment levels do what?

Back 38

interest rates rise, and investment falls

Front 39

review this

Back 39

National Savings = Private Savings + Public Savings

A government budget deficit = negative public savings and therefore reduces national savings which is the supply curve for Loanable funds.