Learning Curve 29: Saving, Investment, and Financial System

the deposits of commercial banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to

$250,000

insolvency

a financial state that occurs if liabilities are greater than assets

bond

a formal contract to repay borrowed money with interest at fixed intervals

during the great depression, the number of bank failures was

a major issues, with approximately 50 percent of banks failing

financial intermediary

an institution that transforms the funds it gathers from many individuals into financial assets

time preference

The human tendency for people, because of impatience, to prefer to spend and consume in the present rather than save and wait to spend and consume in the future; this inclination varies in strength among individuals.

what condition could break the bridge between savers and borrowers?

controls on interests rates; price controls on interest rates can cause the loanable funds market to malfunction

the decrease in private consumption and investment that occurs when government borrows more is called

crowding out

arbitrage ensures that equally risky assets earn

equal returns

An investment tax credit offered during a recession is most likely to be temporary so that:

firms an incentive to invest quickly

savings

income that is not spent on consumption goods

equilibrium in the market for loanable funds determines the

interest rate and the quantity of loanable funds

what happens if investors begin to doubt the solvency of an investment bank?

it may lead the short term loans to disappear more quickly because they are rolled over on a very frequent basis

________ interest rates usually result in less __________

lower ; savings

The ________ the interest rate, the greater the quantity of funds demanded for _________.

lower; investment

in comparison to a low risk company, if a risky company wishes to borrow money, it:

must promise a higher rate of interest because lenders demand compensation for default risk

do bondholders benefit when a company's profits are high?

no, only the shareholders

safe assets tend to

offer low rate of return

the supply curve for savings is...

positively sloped

AIDS has dramatically reduced life expectancies in Africa. What impact would this have on saving rates?

reduce savings since many Africans expect to die young

when the government borrows more, some of the increased borrowing is financed by...

reduced consumption and some by reduced investment

collateral

something pledged as security for repayment of a loan, to be forfeited in the event of a default.

an investment tax credit gives firms that invest in plants and equipment a

tax break

In order to counteract the decrease in investment demand during a recession, the government sometimes offers a

temporary investment tax credit

Owner's Equity

the amount remaining after the value of all liabilities is subtracted from the value of all assets

crowding out

the decrease in private consumption and investment that occurs when government borrows more

Initial Public Offering (IPO)

the first time a company issues stock that may be bought by the general public

the price of loanable funds

the interest rate

market for loanable funds

the market where suppliers of loanable funds (savers) trade with borrowers, thereby determining the equilibrium interest rate

investment

the purchase of new capital goods; private spending on tools, plant, and equipment used to produce future output

Arbitrage

the purchase of securities in one market for immediate resale in another to profit from a price discrepancy

leverage ratio

the ratio of debt to equity, D/E

if consumers decide to save less,

the supply curve in the market for loanable funds will shift to the left

if consumers decide to save more,

the supply curve in the market for loanable funds will shift to the right; this would increase the supply of loanable funds, and the interest rate would fall

stock

A share of ownership in a corporation.