CH 10: SAVING AND INVESTMENT

FALSE

A bubble is a large decrease in asset prices caused by unrealistic expectations about future prices. True False

B

A random walk occurs when an asset price: A. moves in a predicable direction but with random error. B. makes unpredictable movements. C. moves in a predictable way with no error. D. moves slowly but predictably.

A

Assume that I = SPrivate + SGovernment + (IM - X). Furthermore, let's say that imports are equal to exports. In this case, private savings: A. plus government saving are equal to investment. B. plus government savings exceed investment. C. exceed investment. D. plus government saving are less than investment.

D

Businesses will undertake projects if the rate of return is: A. less than the cost of borrowing for the project. B. positive. C. greater than 1. D. greater than or equal to the interest rate levied on the loan.

changes in perceived business opportunities

For instance a new business opportunity that seems to be profitable, can create more demand for loans by people to start that business.

B

If a country has a trade surplus, we can conclude that it also has: A. a budget surplus. B. a net capital outflow. C. a net capital inflow. D. a budget deficit.

A

In the loanable funds market, borrowers: A. are best represented by the demand for loanable funds. B. are not affected by changes in the inflation rate. C. lose money to unexpected increases in the inflation rate. D. are best represented by the supply of loanable funds.

D

National savings equals: A. trade balance plus the budget balance. B. private savings plus consumption spending. C. government spending plus taxes. D. private savings plus the budget balance.

changes in private savings behavior

People sometimes may want to spend more and save less.

Real interest rate

Real interest rate = nominal interest rate - inflation rate.

FALSE

The expenses involved in actually putting together and executing a deal are called liquidity costs. False True

C

The government's budget deficit increases, and at the same time the trade deficit grows. This will lead to a(n) _____ in the demand and a(n) _____ in the supply of loanable funds in domestic markets. A. decrease; increase B. decrease; decrease C. increase; increase D. increase; decrease

B

The term liquidity means that the: A. asset is used in a barter exchange. B. asset is readily convertible to cash without much loss of value. C. asset is used as the medium of exchange. D. market interest rate is too low.

C

When a corporation borrows money from lenders in exchange for a fixed share of the firm's assets and potential profits, the corporation is: A. liquidating a bank deposit. B. taking out a loan. C. issuing stocks. D. issuing bonds.

changes in net capital inflows

When investors perception of a country change, they may decide to invest or withdraw their investment from the country.

D

Which of the following is NOT one of the three tasks of a financial system? A. risk management B. provision of liquidity C. reduction of transaction costs D. determination of fiscal policy

C

Which of the following is the index that includes the most companies and provides the broadest measure of stock market performance? A. the NASDAQ B. the producer price index C. the S&P 500 D. the Dow Jones Industrial Average

wealth

a household's __________ is the balue of its accumulated savings

loanable funds market

a hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders.

fisher effect

according to the __________ an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged

efficient markets hypothesis

according to the ____________ asset prices embody all publicly available information.

liquid

an asset is ____________ if it can be quickly converted into cash without much loss of value

illiquid

an asset is ____________ if it cannot be quickly converted into cash without much loss of value.

transaction costs

are the expenses of negotiating and executing a deal

Financial Markets

are where households invest their current savings and accumulated savings, or wealth, by purchasing financial assets.

Financial markets

channel the savings of households to businesses that want to borrow in order to purchase capital equipment.

Physical capital

consists of manufactured resources, such as buildings and machines.

budget deficit

excess of government spending over tax revenue. This will result in a dissaving's for government

budget surplus

excess of tax revenue over government spending. This will result in a savings for government.

changes in government borrowing

excessive borrowing by government will create more demands for loanable funds but it may have a crowing out effect as well.

mutual fund

financial intermediary that builds a stock portfolio and resells shares of this portfolio to individual investors.

diversification

investing in several assets with unrelated, or independent, risks; reduces risk.

bank deposit

is a claim on a bank that obliges the bank to give the depositor his or her cash when demanded

bank

is a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investment spending needs of borrowers

financial asset

is a paper claim that entitles the buyer to future income from the seller

liability

is a requirement to pay income in the future. ex loan

physical asset

is a tangible object that can be used to generate future income.

pension fund

is a type of mutual fund that holds assets in order to provide retirement income to its members

loan backed security

is an asset created by pooling individual loans and selling shares in that pool

financial intermediary

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

Financial capital

is funds from savings that are available for investment spending.

Present value

is the amount of money needed today to receive a given amount of money at a future date given the interest rate.

budget balance

is the difference between tax revenue and government spending

Human capital

is the improvement in the labor force generated by education and knowledge.

random walk

is the movement over time of an unpredictable variable

capital inflow

is the net inflow of funds into a country

interest rate

is the price, calculated as a percentage of the amount borrowed, charged by lenders to borrowers for the use of their savings for one year.

Net capital inflow

is the total flow of funds into a country minus the total flow of funds out of a country.

financial risk

is uncertainty about future outcomes that involve financial losses and gains

crowding out

occurs when a government deficit drives up the interest rate and leads to reduced investment spending

savings-investment spending identity

savings and investment spending are always equal for the economy as a whole

life insurance company

sells policies that guarantee a payment to a policy holders beneficiaries when the policy holder dies

national savings

the sum of private savings and the budget balance, is the total amount of savings generated within the economy