CHP 14 hw MACRO

Suppose government spending was $3.60 trillion, tax revenue was $4.50 trillion, GDP was $13.94 trillion, and total consumer spending was $10.95 trillion.

Three equations will help us find these answers: Public savings = Taxes - Government spending Private savings = Income - Taxes - Consumer spending National savings = Public savings + Private savings Government spending was $3.60 trillion, tax revenue was $4.50 trillion, GDP was $13.94 trillion, and total consumer spending was $10.95 trillion. We can therefore plug in these numbers as follows: Public savings = $4.50 trillion - $3.60 trillion = $0.90 trillion. Private savings = $13.94 trillion - $4.50 trillion - $10.95 trillion = $-1.51 trillion. National savings is therefore public savings of $0.90 trillion plus private savings of $-1.51 trillion = $-0.61 trillion.

Securitization refers to:

combining several loans or other financial assets into a bundle and then selling that bundle in whole or in parts to financial investors.

When Collins Inc. uses the proceeds from issuing bonds to purchase equipment needed to start a new product line, this is an example of:

investment

Companies issue stock in order to:

raise capital without borrowing.

During the recent housing market crisis, lenders:

relied too much on securitization to diversify their financial investments

If Daisy buys some of the Collins Inc. bonds, her purchase is an example of:

saving

There are three main terminology choices in the paragraph, marked with letters that point you to explanations below. When Americans (a) save by buying securities such as stocks and bonds or putting money in a bank, they provide funds for firms wishing to engage in (b) investment by buying assets used to produce goods and services. Households with extra money left over after buying things they want or need purchase securities or put their funds in savings accounts, and banks help transfer those funds to firms. By matching and working with these borrowers and lenders, banks act as (c) an intermediary. a. Although it's common to refer to buying stocks and bonds as "investment" in everyday speech, economists instead call it "saving." b. Investment is the term for firms buying productive assets such as buildings and machines used to produce goods and services. Diversification, on the other hand, refers to the method by which savers lend funds to several investors, on the premise that several borrowers with different characteristics are much less likely to default at the same time, compared to a single borrower. c. Banks provide liquidity when they make funds easily and cheaply available to their depositors, but that is not what's described here. This portion of the article describes banks acting as an intermediary between savers with extra funds available to lend and borrowers like firms that want to invest in productive assets like buildings and machinery.

A save B Investment c an intermediary

The identity between national savings and investment holds only in a(n):

Closed economy

In each of the following examples, name the financial product being described. a. A family borrows money to pay for a house: ____ A new tech start-up offers investors the ability to purchase a small part of the company to raise needed capital: _____ c. The U.S. government offers to pay investors a 3 percent return rate next year if they finance its debt today:_______

Explanation Equity is ownership in a company, and the most common form of such ownership is stock. As partial owners, stockholders are entitled to receive a portion of a company's profits, in the form of dividends, in proportion to the size of their ownership. A mortgage is a loan agreement between a lender and a borrower in which the lender lends money to the borrower in exchange for a promise to repay the amount loaned. A bond is a loan that has been standardized into a more easily tradable and liquid asset.a. Mortgage.b. Stock.c. Bond.

According to the efficient-market hypothesis, a portfolio selected by a group of trained analysts will generally yield a higher rate of return than an index fund.

FALSE False. The efficient-market hypothesis says that market prices always incorporate all available information, and therefore represent the true value as correctly as is possible. If this is true, then stocks selected by trained analysts will perform no better than a nonmanaged index fund that represents all the stocks in a broad segment of the market.

Evaluate whether the following statements are true or false. a. Risk is measured by looking at the expected value (average) of an asset's returns over time b. Market risk can be minimized with a well-diversified portfolio. c. Idiosyncratic risk is unique to a particular asset rather than the market as a whole. d. A portfolio of well-diversified assets will often be less risky for the same level of return when compared to an individual asset.

a. F In financial markets, the simplest way to measure risk is to look at the standard deviation of an asset's return over time. b. F Market risk, or systemic risk, refers to any risk that is broadly shared by the entire market or economy. Because all businesses will face the consequences of rising prices, market risk is hard to eliminate via diversification. c. T Idiosyncratic risks are unique to a particular company or asset—for example, the risk that a particular company will make a bad business decision, causing the value of its stock to fall. Idiosyncratic risks are the easiest to lower or even eliminate via diversification. d. T A portfolio—a collection or group of many different assets—will often have a higher return for a given level of risk than any individual asset could offer (or, in other words, will be less risky for the same level of return as any individual asset).

For each scenario, indicate whether it is an example of moral hazard or adverse selection. a.You decide to buy a new car instead of a used car because you are worried about the quality of the used car. b. You sell your condominium because you fear there will be a large special assessment next year. There has been no official notice of an upcoming assessment. c. The owner of a company has just secured a new line of credit from the bank. He decides to change his business plan and open a second office in a foreign country. d. A firm that has purchased a large insurance policy becomes careless about setting the security alarm. e. A number of households find themselves owing more on their mortgages than their houses are currently worth. Some of them decide to abandon the house and walk away. f. The owners of a company suspect there will be more competition from foreign producers in upcoming years. They have just issued new shares of stock in their company.

a. adverse selection b. adverse selection c. moral hazard d. moral hazard e. moral hazard f. adverse selection

When compared to financial investments in debt-based assets (e.g., bonds), financial investments in equity-based assets (e.g., stocks) usually pay a ___ rate of return because debt assets typically carry a ____ level of risk.

higher, lower Financial investment occurs when people take their savings and purchase assets such as bonds and stocks in order to earn interest. Debt-based assets usually carry a lower level of risk than equity-based assets because debtors are legally obligated to repay creditors, but the value of equity is tied directly to the value of the company. In the event of bankruptcy, debtors have claim on the assets of the company before shareholders. Because equity-based assets are more risky, they typically average a higher rate of return over time to compensate investors for the added risk.