MacroEconomics Chapter 29
supply
Four of the major factors that determine the ___________ of savings: Smoothing consumption. Impatience. Marketing and psychological factors. Interest rates.
investments
Higher __________ increases the standard of living and the rate of economic growth
a
If there is a shortage of loanable funds, the interest rate will: a) Increase. b) Decrease. c) Stay the same
c
The main function of financial intermediaries is to: a) Make capital investments. b) Provide investment advice. c) Mobilize savings towards productive uses
Investment
The purchase of new capital goods
Leverage ratio
The ratio of debt to equity, or D/E
a
The risk that a borrower will not pay the loan back is called: a) Default risk. b) Interest rate risk. c) Crowding out.
face value
The value of a bond at maturity is called
Owner equity
The value of the asset minus the debt, or E = V − D
saving
You can smooth your consumption by ________ during the working years and dissaving during the retirement years.
Rate of return formula
[( FV - Price) / Price ] x100
Saving and borrowing
___________ and __________ allow individuals, firms, and governments to smooth their consumption over time.
Bonds
___________ are a way to raise a large sum of money for long-lived assets, and pay it back over a long period of time.
Usury laws
___________ impose a maximum ceiling on the interest rate that can be charged on a loa
Financial intermediaries
________________ bridge the gap between savers and borrowers.
Financial intermediaries
________________ reduce the costs of moving savings from savers to borrowers and help mobilize savings toward productive uses
Financial intermediaries
_____________________ also collect savings, evaluate investments, diversify risk, and help finance new and innovative ideas.
Stock
a certificate of ownership in a corporation.
Which of the following is a major factor in determining the supply of savings? a) GDP. b) Patience. c) Investment
b
Financial crisis of 2007-2008
Leading up to the crisis, Americans borrowed more than ever. The borrowing was centered in the housing and banking sectors. In the 1990s and 2000s, lenders became convinced that house prices were unlikely to fall. They became willing to lend with much lower down payments. At the height of the housing boom in 2006, 17% of mortgages were made with 0% down payment.
Causes of the crisis
Leverage Securitization shadow banking
Market for loanable funds
Occurs when suppliers of loanable funds (savers) trade with demanders of loanable funds (borrowers). Trading in the market for loanable funds determines the equilibrium interest rat
capital
Savings are necessary for ___________ accumulation. The more _________ an economy can invest, the greater is GDP per capita.
a
Something of value that becomes the property of the lender if the borrower defaults is called: a) Collateral. b) Interest. c) A bond.
Collateral
Something of value that by agreement becomes the property of the lender if the borrower defaults.
Financial intermediaries:
Such as banks, bond markets, and stock markets reduce the costs of moving savings from savers to borrowers and investors
lending
The 2007-2008 crisis was brought about by high leverage and falling asset prices that created a panic and sharply reduced the amount of _____________ in the economy
Arbitrage
The buying and selling of equally risky assets; arbitrage ensures that equally risky assets earn equal returns.
Crowding out
The decrease in private consumption and investment that occurs when government borrows more.
time preference
The desire to have goods and services sooner rather than later (all else being equal).
Initial public offering (IPO)
The first time a corporation sells stock to the public in order to raise capital.
T-bills
maturities of a few days to 26 weeks; pay only at maturity
T-notes
maturities ranging from 2 to 10 years; pay interest every 6 months
Zero-coupon bonds
pay only at maturity.
T-bonds
30-year bonds; pay interest every 6 months.
bond market
A corporation acknowledges its debt to a member of the public by issuing a bond, or corporate IOU.
default risk
All bonds involve___________ or the risk that the borrower will not pay back the loa
c
Banks that are funded by investors and are not insured by the FDIC are called: a) Traditional banks. b) Commercial banks. c) Shadow banks.
Saving
Income that is not spent on consumption goods.
financial intermediation
Insecure property rights, inflation, politicized lending, and bank failures and panics can all contribute to the breakdown of ________________.
opposite
Interest rates and bond prices move in ____________ directions. When interest rates go up, bond prices fall; when interest rates go down, bond prices rise.
