EC202 Chapter 9

The shadow banking system refers to

non-bank financial firms that act as banks by borrowing and lending in an effort to make a profit.

What effect will an increase in interest rates have on the quantity of loanable funds supplied?

quantity supplied will increase

The source of the _____ for loanable funds is saving

supply

Which of the choices most accurately describes the role of securitization in contributing to the crisis?

Banks bundled mortgages together and then sold them on the market as a financial asset. However, the risk level of these securitized assets was often much higher than the purchaser thought.

_______ are a mechanism by which crowding out occurs.

Increases in interest rates

What is crowding out?

a reduction in consumption and investment spending that results from government borrowing

The _____ represents the price of a loan.

interest rate

-Increases the interest rate -Decreases the interest rate

-an investment tax credit, an increase in large investments -an increase in savings, a decrease in investor optimism

As interest rate decreases, what happens to the quantity of loanable funds demanded?

Quantity demanded will increase

Which of the following best defines a financial intermediary?

a financial institution that transforms investor funds into financial assets

Consumption smoothing

borrowing in periods of low income and saving in periods of high income to make consumption less variable than income

The source of the _____ for loanable funds is investment

demand

Identify an example of consumption smoothing

depositing a portion of one's salary into a retirement account

-China decides to reduce its capital investment in the United States, as it expects low returns due to a weak U.S. economy -Calopolis, a college town in Northern California, has for many years banned the presence of fast food restaurants in city limits. As of 2012, however, the city will allow several fast food companies to open franchised locations -Due to an increase in revenue after a tax hike, the United States is able to eliminate the deficit and begins to maintain a balanced budget for the first time in several decades -As a result of a stock market boom, individuals begin to feel richer and spend more while also saving less

-shift in supply -shift in demand -shift in demand -shift in supply