ECON Chapter 7

If the annual interest paid on a $500 loan is $25, the nominal interest rate is 5% per year:

$25/$500 X 100

U.S. loanable funds market when exports equal imports

(X=M) or global loanable funds market

The supply of loanable funds in influenced by:

- wealth and default risk - the real interest rate - disposable income and expected future income

Changes in the Demand of Supply(increase in demand)

An increase in the demand for loanable funds raises the real interest rate and increase savings.

U.S. investment is financed from:

private saving, government budget surpluses, and borrowing from the rest of the world.

the total quantity of funds demanded to finance investment the government budget deficit and international investment or lending during a given period.

quantity of loanable funds demanded

When the real interest rate falls, the ______ because the ______is the opportunity cost of loanable funds.

quantity of loanable funds demanded increases; real interest rate

is the total funds available from saving, the government budget surplus and supplied by the Fed, during a given period.

quantity of loanable funds supplied

A government budget deficit _____the real interest rate because_______.

raises; the demand for loanable funds increases.

is the nominal interest rate adjusted to remove the effects of inflation on the buying power of money

real interest rate

The _____ interest rate is the opportunity cost of loanable funds because _______.

real; the real interest paid on borrowed funds is the opportunity cost of borrowing and the real rate forgone is the opportunity cost of not saving or lending those funds.

When a person buys a newly issued bond, he or she may hold the bond until the borrower has ____________.

repaid the amount borrowed or sell it to someone else

The demand for loanable funds increases and the supply of loanable funds increases. As a result, the equilibrium real interest rate ______ and the equilibrium quantity of loanable funds _____.

rises, falls, or remains the same; increases

The demand for loanable funds increases and the supply of loanable funds decreases. As a result, the equilibrium real interest rate ____ and the equilibrium quantity of loanable funds _____.

rises; increases, decreases or remains the same.

is the amount of income that is not paid in taxes or spent on consumption goods and services

saving

it increases wealth

saving

According to the Ricardo-Barro effect, when a government budget deficit occurs today, ________.

saving increases, the supply of loanable funds increases, and the real interest rate does not change.

If the net worth is positive, the institution is ____.

solvent

is a certificate of ownership and claim to the forms profits.

stock

Financial assets

stocks, bonds, short term securities and loans are collectively

A change in disposable income, expected future income, wealth, or default risk changes

supply of loanable funds

The loanable funds market is

the aggregate of all individual financial markets

Net investment is:

the change in the value of capital

Paid

the real interest paid on borrowed funds is the opportunity cost of borrowing

The demand for loanable funds is determined by _______.

the real interest rate and expected profit

crowding out effect

the tendency for budget deficit to raise the real interest rate and decrease investment. It does not decrease investment by full amount of the government budget deficit because a higher real interest rte induces an increase in private saving that partly contributes toward financing the deficit.

Gross investment is:

the total amount spent on new capital

is the value of things that people own

wealth

When the price of an asset rises, the interest rate ______, everything else remaining the same.

FALLS

T or F: The greater the default risk, the greater is the supply of loanable funds.

FALSE

T or F: The higher the real interest rate, the greater is the demand for loanable funds, other things remaining the same.

FALSE

is the central bank if the United States, a public authority whose main role is the regulation of banks and money

Federal Reserve System

Bonds issued by Wal-Mart and stocks issued by Boeing are examples of

Financial capital

the funds that firms use to buy physical capital

Financial capital

Example: A government budget surplus of $1 trillion adds to private saving and the private supply of loanable funds curve PSLF, to determine the supply of loanable funds curve , SLF. The real interest rate falls to 5% a year. private saving decreases to $1.5 trillion but investment increases to $2.5 trillion. Note: Government budget surplus increases the supply of loanable funds.

Government budget surplus

Are the taxes paid to governments minus the cash transfers received from governments (such as Social Security and unemployment benefits)

Net taxes

Ovens used by pizza hut and lawn mowers used by Larry's Mowing are examples of:

Physical capital

the tools, instruments, machines, buildings and other items that have been produced in the past and that are used today to produce goods and services

Physical capital

Real interest rate formula

Real interest rate= Nominal interest rate - inflation / (1 +Inflation rate / 100)

I =

S + (T - G) + (M - X)

T or F: An increase in expected future income DECREASES the supply of loanable funds.

TRUE

T or F: An increase in wealth decreases the supply of loanable funds.

TRUE

How can the change in U.S. wealth differ from U.S. saving?

The change in wealth includes changes in the price of assets owned and saving excludes these items.

National savings

The sum of private saving,S and government saving (T-G)

True or False: Households often want finance to purchase big ticket items, such as automobiles, or household furnishings and appliances.

True

True or False: The wealth of a nation at the end of a year equals its wealth at the start of the year plus its saving during the year, which equals income minus consumption expenditure.

True

Supply of loanable funds

a change in the real interest rate change the quantity of loanable funds supplied and brings a movement along the supply of loanable funds curve. a increase in the real interest rate increases saving and the quantity of loanable funds supplied. A fall in the real interest rate decreases savings and the quantity of loanable funds supplied.

government budget deficit

a government budget deficit adds to the private demand for loanable funds curve, PDLf, to determine the demand for loanable funds curve, DLF. The real interest rate rises, saving increases but investment decreases-- a crowing out effect. Government budget deficit increases the demand for loanable funds, equilibrium raises the real interest rate. (G-T) (Government -Taxes) and T<G increases the DLF

disposable income

a households disposable income is the income earned minus net taxes. When disposable income increases, other things remain the same, consumption expenditure increases but less than the increase in income and greater the savings.

Equilibrium in the loanable funds Market

a surplus of funds lowers the real interest rate and a shortage of funds raises it. At an interest rate of 6% a year the quantity of funds demanded equals the quantity supplied and the market is in equilibrium. (Surplus of funds --real interest rate falls). (Shortage or real interest rate rises.)

Change in the Demand of Supply (an increase in supply)

an increase in the supply of loanable funds lowers the real interest rate and increases investment. it increase the equilibrium supply.

____ is a promise to make specified payments on specified dates

bond

bond market

bonds issued by firms and governments are traded in

(M-X)

borrowing from the rest of the world

Government enters the loanable funds market when it has a ___ or ____.

budget surplus; budget deficit

Expected profit rises during a ____ expansion and falls during a _____; rises when technological change creates ______ new products; rises as a growing population brings increased demand for goods and services; and pessimism, called

business cycle; recession; profitable; animal spirits

quantity of capital

changes because of investment and depreciation

An increase in expected future income ___________.

decreases the supply of loanable funds today because households with larger expected future income will save more today.

An increase in current income taxes______the supply of loanable funds today because it _______.

decreases; decreases disposable income, which decreases saving.

The crowding-out effect is the tendency for a government budget _____to _______ the real interest rate and decrease ______.

deficit; raise; investment

is the relationship between between the quantity of loanable funds and demanded and the real interest rate, when all other influences on borrowing plans remain the same

demand for loanable funds

The NY stock exchange, the london stock exchange, tokyo stock exchange

examples of stock markets

Households make saving decisions by considering all of the following factors EXCEPT:

expected profit

The demand for loanable funds changes when _______ changes.

expected profit

When the ____ profit changes, the demand of loanable funds change.

expected;

is a firm that operates on both sides of the markets for financial capital (borrower and lender)

financial institution

Loanable funds flow among countries because ________

fund flow into the country with the highest real interest rate and out of the country in which the real interest rate is lowest.

(T-G)

government budget surplus

According to the Ricardo-Barro effect, a government budget deficit _______ the real interest rate.

has no effect on

Other things remain the same, the _____ the real interest rate, the _____ is the quantity of loanable funds demand; and the _____ the real interest rate, the _____ the quantity of loanable funds.

higher; smaller; lower; greater (Demand for loanable funds)

A firm is ____ if it has made long term loans with borrowed funds and is faced with a sudden demand to repay more of what is has borrowed that its ____ cash.

illiquid; available

Y= C+S+T

income is equal to the sum of consumption expenditure, saving, and net taxes

A government budget surplus _____ the supply of loanable funds. The real interest rate _____, ______ decreases, and ______increases.

increases; falls; private saving; investment

A government budget deficit ____the demand for loanable funds. The real interest rate _____, _______ increases, and ______ decreases.

increases; rises; private saving; investment

First Call, Inc. is a cellular phone company. First call expects its profit from the sale of cell phones to double next year. If everything else remains the same, how does this increase in expected profit influence First Call's demand for loanable funds? The increase in expected profit ________ the demand for loanable funds and brings ________ the demand for loanable funds curve.

increases; a rightward shift of

if the net worth is negative, the institution is ____.

insolvent

I=S

investment = savings

To make RGDP grow, saving and wealth must be transformed into ____.

investment and capital

Stock Market

is a financial market in which shares of stock of corporations are traded.

S=

is financed by household saving

The three main types of markets for financial capital are:

loan markets bond markets stock markets

Wealth also increase when the ____ of assets ____ called ____

market value; rises; capital gain

The holder a ____ is entitled to receive payments that derive from the payments received by the mortgage lender from ___

mortgage- backed security; home buyer borrower

A type of bond that entitles its holder to the income from a package of mortgages.

mortgage-backed security

____a legal contract that gives ownership of a home to the lender in the event that the borrower fails to meet the agreed loan payment _____. (Expenditure on new homes is counted as part of ____.

mortgage; repayment and interest; investment

is the market value of what has lent minus the market value of what it has borrowed.

net worth

When things remain the same, the greater the expected profit from _____ the greater is the amount of ____ and the greater the demand for loanable funds.

new capital; investment

is the number of dollars that a borrower pays and a lender receive in interest in a year expressed as a percentage of the number of dollars borrowed or lent.

nominal interest rate

focusing on real interest rate:

other things remaining the same the higher the real interest rate the greater is the quantity of loanable funds supplied and the lower the real interest rate the smaller is the quantity of loanable supplied.

a change in the real interest rate changes the quantity of loanable funds demanded and brings a movement along the demand curve. A rise in the real interest rate decreases investment and the quantity of loanable funds demanded. A fall in the real interest rate increases investment and the quantity of loanable funds demanded.

Demand for loanable funds