ECON CH 7
financial institution
a firm that operates on both sides of the markets for financial capital. A financial institution is a borrower in one market and a lender in the other.
Consider a payment of $400, which will be made three years in the future. The interest rate is 3 percent. The present value of this payment is $___
present value= future value / (1 + r)^n
Real interest rate
the nominal interest rate adjusted to remove effects of inflation on buying power of money, and is approximately equal to the nominal interest rate minus inflation rate.
Nominal interest rate
the number of dollars that a borrower pays and a lender receives in interest in a year expressed as a percentage of the number of dollars borrowed and lent.
stock
A certificate of ownership in a corporation and claim to the firm's profits
How can the change in U.S. wealth differ from U.S. saving? A.The change in wealth includes changes in the prices of assets owned and saving excludes these items. B.The change in wealth always equals saving. C.The change in wealth equals income minus consumption, which is not equal to saving. D.Saving exceeds the change in wealth when consumption expenditure exceeds income
A.The change in wealth includes changes in the prices of assets owned and saving excludes these items.
The loanable funds market is the aggregate of all the individual _____ markets. A.financial B.commodity C.auction D.labo
A.financial
Saving is the amount of income that is _____ in net taxes or spent on _____ goods and services. A.not paid; consumption B.paid; consumption C.not paid; capital D.paid; capital
A.not paid; consumption
A stock is a certificate of _____ and claim to the _____ that a firm makes. A.ownership; profits Your answer is correct. B.saving; profits C.deposit; loans D.secured loan; revenues
A.ownership; profits
The demand for loanable funds increases and the supply of loanable funds decreases. As a result, the equilibrium real interest rate ______ and the equilibrium quantity of loanable funds ______. A.rises; increases, decreases, or remains the same B.falls; decreases C.rises, falls, or remains the same; increases D.rises, falls, or remains the same; increases, decreases, or remains the same
A.rises; increases, decreases, or remains the same
The demand for loanable funds is the relationship between _____ demanded and the _____ when all other influences on borrowing plans remain the same. A.the quantity of loanable funds; real interest rate B.the quantity of capital; real interest rate C.loanable funds; real interest rate D.loanable funds; real wage rate
A.the quantity of loanable funds; real interest rate
Daisy loans Alfred $10,000 and a year later, Alfred pays Daisy $10,400. If the inflation rate during that year is 1.5 percent, what is the real interest rate that Alfred is paying to Daisy? The real interest rate that Alfred is paying to Daisy is _______. A.5.5 percent a year B.2.5 percent a year C.2.7 percent a year D.unknown
B.2.5 percent a year
A government budget deficit _______ loanable funds. A.decreases the supply of B.increases the demand for C.decreases the demand for D.increases the supply of
B.increases the demand for
A government budget surplus _______ loanable funds. A.decreases the supply of B.increases the supply of C.increases the demand for D.decreases the demand for
B.increases the supply of
A government budget surplus _______ the real interest rate, decreases ______. A.raises; investment, and increases private saving B.lowers; private saving, and increases investment C.lowers; investment, and increases private saving D.raises; private saving, and increases investment
B.lowers; private saving, and increases investment
The crowding-out effect is the tendency for a government budget deficit to raise the _____ and _____ investment. A.real wage rate; decrease B.real interest rate; decrease C.price level; increase D.quantity of output; increase
B.real interest rate; decrease
The risk that a borrower, also known as a creditor, might not _____ is called credit risk or default risk. A.pay the specified interest rate B.repay a loan C.buy insurance D.send information to lender
B.repay a loan
What determines the supply of loanable funds and what makes it change? The supply of loanable funds is determined by the _________. The supply of loanable funds changes when _______. A.decisions of financial institutions; the real interest rate changes B.saving decisions of households, which are influenced by the real interest rate, disposable income, expected future income, wealth, and default risk; disposable income, expected future income, wealth, or default risk change C.saving decisions of households, which are influenced by the real interest rate, disposable income, expected future income, wealth, and default risk; the real interest rate changes D.demand for loanable funds; the demand for loanable funds change
B.saving decisions of households, which are influenced by the real interest rate, disposable income, expected future income, wealth, and default risk;
The supply of loanable funds is the relationship between _____ supplied and the _____ when all other influences on lending plans remain the same. A.loanable funds; real interest rate B.the quantity of loanable funds; real interest rate C.the quantity of capital; real interest rate D.loanable funds; real wage rate
B.the quantity of loanable funds; real interest rate
If the annual interest paid on a $500 loan is $25, the nominal interest rate is _____ percent per year. If the nominal interest rate is 5 percent per year and the inflation rate is 2 percent a year, the real interest rate is _____ per year. A.4; 4 B.3; 5 C.5; 3 D.5; 7
C.5; 3
Net worth is the total market value of what a financial institution has _____ minus the market value of what it has _____. A.spent; earned B.lent; spent C.lent; borrowed D.earned; saved
C.lent; borrowed
Net present value is the _______. A.present value of the marginal benefit from a financial decision minus its marginal cost B.present value of all the future flows of money that arise from a financial decision divided by the number of years until a profit is expected from the decision C.present value of all the future flows of money that arise from a financial decision minus the initial cost of the decision D.future value of a decision divided by (1 + r)
C.present value of all the future flows of money that arise from a financial decision minus the initial cost of the decision
How do changes in the demand for and supply of loanable funds change the real interest rate and quantity of loanable funds? The demand for loanable funds increases and the supply of loanable funds increases. As a result, the equilibrium real interest rate ______ and the equilibrium quantity of loanable funds ______. A.falls; increases B.rises; increases, decreases, or remains the same C.rises, falls, or remains the same; increases D.falls; decreases
C.rises, falls, or remains the same; increases
State the financial decision rule: If the net present value is positive _______ and if the net present value is negative _______. A.invest more money; invest less money B.do not take the action until the interest rate rises; do not take the action until the interest rate falls C.take the action; do not take the action D.hire more workers; hire fewer workers
C.take the action; do not take the action
The net present value is the _______ flows of money from a financial decision minus _____ . A.total; total cost arising from the decision B.future; the cost of the decision C.value today of all future; the initial cost of the decision D.future value of all; the cost of making the decision
C.value today of all future; the initial cost of the decision
A financial institution is a firm that operates on both sides of the markets for _____: It _____ in one market and _____ in another. A.investments; buys; sells B.profits; earns; spends C.loans; lends; saves D.financial capital; borrows; lends
D.financial capital; borrows; lends
How do households make saving decisions? The _______, the greater is the amount that a household decides to save. A.smaller a household's expected future income and the greater a household's wealth B.higher the expected profit and the greater a household's disposable income C.smaller the default risk and the greater a household's wealth D.greater a household's disposable income and the smaller a household's expected future income
D.greater a household's disposable income and the smaller a household's expected future income
A government budget deficit _______ the real interest rate, increases ______. A.lowers; private saving, and decreases investment B.raises; investment, and decreases private saving C.lowers; investment, and decreases private saving D.raises; private saving, and decreases investment
D.raises; private saving, and decreases investment
stock market
a financial market in which shares of stocks of corporations are traded
mortgage
a legal contract that gives ownership of a home to the lender in the event that the borrower fails to meet the agreed loan payments (repayments and interest)
bond
a promise to make specified payments on specified dates
bond market
bonds issued by firms and governments are traded here // Ex: US Treasury
wealth is the value of all the things that people____ a. spend b. save c. own d. demand
c. own
financial capital
consists of the funds that firms use to buy physical capital... and that households use to buy a home or to invest in human capital
Net worth
the market value of what it has lent minus the market value of what it has borrowed.
finance
describes lending and borrowing
mortgage- backed- security
entitles its holder to the income form a package of mortgages
net investment
equals gross investment minus depreciation
The financial decision rule is
if the net present value is positive, do it! If the net present value is negative, don't do it!
Net present value
is the present value of all the future flows of money that arise from a financial decision, minus the initial cost of the decision.
Joe has a term deposit that pays 5 percent a year and its value after two years will be $2,000. What is the present value of Joe's term deposit?
present value= future value / (1 + r)^n
What is the present value of $250, three years in the future if the interest rate is 4 percent?
present value= future value / (1 + r)^n
Loanable funds market
the aggregate of all the individual financial markets.
saving
the amount of income that is not paid in taxes or spent on consumption goods and services
Federal Reserve System (the Fed)
the central bank of the US, a public authority whose main role is the regulation of banks and money.
Supply of loanable funds
the relationship between the quantity of loanable funds supplied and the real interest rate when all other influences on lending plans remain the same.
Default risk
the risk that a loan will not be repaid
National saving
the sum of private saving, S, and government saving, (T - G)
Net taxes
the taxes paid to governments minus the cash transfers received from governments (such as Social Security and unemployment benefits). So income is equal to the sum of consumption expenditure, saving, and net taxes:
gross investment
the total amount spent on new capital
wealth
the value of the things that people own
physical capital
tools, instruments, machines, buildings, and inventories
A mortgage is a legal contract that gives ownership of a _____ to the _____ in the event that the _____ fails to meet the agreed loan payments (repayments and interest). A.car; lender; borrower B.home; lender; borrower C.car; borrower; lender D.home; borrower; lender
B.home; lender; borrower