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26 Cards in this Set

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These are the two categories of financial institutions in the US economy.
What are Financial Markets and Financial Intermediaries?
What are the two most important financial markets in our economy
The bond market and the stock market.
What is a bond?
A bond is a certificate of indebtedness that specifies the obligations of a borrower to the holder of the bond.
What is the "date of maturity" of a bond?
This is the time at which the loan associate with the bond will be repaid.
What are the three most important characteristics of bonds?
1. The bond's term.
2. The bond's credit risk.
3. The bond's tax treatment.
What is a perpituity?
This is a kind of bond ( issued by the British government ) that never matures.
What are municipal bonds?
These are bonds issued by state and local governments.
What is the advantage of municipal bonds?
Owners of these bonds are not required to pay federal tax on the interest income.
What is equity finance?
This kind of finance consists
of sale of stock.
What is a stock index?
This is a value computed as an average of a group of stock prices.
What are two of the most important financial intermediaries?
Banks and Mutual Funds.
As a financial intermediary, what role does banks serve?
Banks provide a means for savers to indirectly provide funds to borrowers.
What is a mutual fund?
A mutual fund is an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks, bonds, or stocks and bonds.
What is the appeal of mutual funds?
The main appeal of mutual funds is that they allow people with limited funds to diversify their investment.
What is a secondary appeal of mutual funds?
A secondary appeal of mutual funds is that they give "ordinary" people the benefit of professional money managers.
What is the formula that determines GDP?
Y=C+I+G+NX


GDP = Consumption + Investment + Government Spending + Net Exports
What is the formula for GDP in a closed economy?
Y=C+I+G
In a closed economy what can be said about savings?
Savings = Investment
What is the formula for national savings ( disregarding taxes )?
S=Y-C-G
What is the formula for national savings taking taxes into account?
s= (Y-T-C) + (T-G)
How can the formula for savings be written in terms of public and private savings
S=(Y-C-T) + (T-G)

Y-C-T = Public Savings
T-G = Private Savings
When does the government run a budget deficit?
When G > T
What is the market for loanable funds.
The market for loanable funds is a single market that includes all of the savers and borrowers in an economy. This is a simplification. In practice there are many financial markets.
How would a tax incentive to encourage saving affect the market for loanable funds?
A tax incentive to encourage saving would affect the market for loanable funds by shifting the supply curve to the right.
How would a tax incentive to encourage investment affect the market for loanable funds?
A tax incentive to encourage investment would affect the market for loanable funds by shifting the demand curve to the right.
How does a government deficit affect the market for loanable funds.
A government deficit reduces the amount of money available for public investment/saving. This causes the supply curve to move to the left.