Macroeconomics Chapter 7

country's net exports are negative. What happens?

, the rest of the world supplies funds to that country and the quantity of loanable funds in that country is greater than national saving

What does an increase in expected profit lead to in terms of DLF? In terms of saving and quantity of funds?

- DLF:increases the demand for funds today. The real interest rate rises -Saving: increases

The world equilibrium real interest rate is ______ a year

5%

What happens when real interest rates rise? falls?

A rise in the real interest rate decreases the quantity of loanable funds demanded. A fall in the real interest rate increases the quantity of loanable funds demanded

What are the factors that change the supply of loan able funds?

An increase in disposable income, a decrease in expected future income, a decrease in wealth, or a fall in default risk increases saving and increases the supply of loanable funds.

world real interest rate. (quantity supplied)

quantity supplied by domestic lenders exceeds what domestic borrowers want. The excess quantity supplied goes to foreign borrowers.

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

real interest rate

What makes up the supply of loanable funds?

saving

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

saving

Financial markets in the long run

stable

certificate of ownership and claim to the firms profits

stock

a financial market in which shares of stocks of corporations are traded.

stock market

is the relationship between the quantity of loanable funds supplied and the real interest rate when all other influences on lending plans remain the same.

supply of loanable funds

Country's net export are positive. What happens?

the country is a net supplier of funds to the rest of the world and the quantity of loanable funds in that country is less than national saving

What happens when expected profit changes?

the demand for loanable funds changes.

What happens when expected profit becomes greater?

the greater is the amount of investment and the greater the demand for loanable funds

is the value of all the things that people own

wealth

What are the key factors of financial institution?

Commercial banks Government-sponsored mortgage lenders Pension funds Insurance companies

What are the sources of funds?

Household saving S 2. Government budget surplus (T - G) 3. Borrowing from the rest of the world (M - X)

What are the types of financial market?

Loan markets Bond markets Stock markets

is 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

What does the quantity of supply of loan able funds depend on?

The real interest rate 2. Disposable income 3. Expected future income 4. Wealth 5. Default risk

The quantity of loanable funds demanded depends on?

The real interest rate 2. Expected profit

Increase of supply of loan able funds ( shift)? What does it do?

The real interest rate falls. Investment increases.

Equilibrium in the Loanable Funds Market

at the real interest rate at which the quantity of loanable funds demanded equals the quantity of loanable funds supplied

is a promise to make specified payments on specific dates

bond

bonds issued by firms and government

bond market

want to pay the lowest possible real interest rate and they will seek it by looking around the world

borrowers

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

demand for loanable funds

is the decrease in the quantity of capital that results from wear and tear and obsolescence

depreciation

The funds that firms use to buy physical capital

financial capital

is a firm that operates on both sides of the markets for financial capital

financial institution

What do the fluctuations due to volatility come from?

fluctuations bring fluctuations in the real interest rate and in the equilibrium quantity of funds lent and borrowed. They also bring fluctuations in asset prices.

Where does volatility come from in the short run?

fluctuations in either the demand for loanable funds or the supply of loanable funds

enters the loanable funds market when it has a budget surplus or deficit

government

increases the demand for funds.

government budget deficit

increases the supply of funds.

government budget surplus

is the total amount spent on purchases of new capital and on replacing depreciated capital

gross investment

Financial markets in the short run

highly volatile.

What does saving do the wealth?

increase wealth

What happens when the government budget deficit decreases?

increases the demand for funds. The real interest rate rises. Private saving increases. Investment decreases

What happens when the government budget surplus increases?

increases the supply of funds. The real interest rate falls. Private saving decreases. Investment increases.

What is the relationship between wealth and market value of assets?

increases when the market value of assets rises—called capital gains—and decreases when the market value of assets falls—called capital losses

is the interest received expressed as a percentage of the price of the asset.

interest rate of the financial asset

What happens when the net worth of a financial institution is negative?

it is insolvent and does not remain in business

What happens when the net worth of a financial institution is positive?

it is solvent and remains in business

want to earn the highest possible real interest rate and they will seek it by looking around the world

lenders

is the aggregate of all the individual financial markets.

market for loan able funds

a legal contract that gives ownership of a home to the lender in the event that the borrower fails to meet the agreed loan payments

mortgage

entitles it holder to the income from a package of mortagages

mortgage backed security

Gross investment - Depreciation

net investment

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

net worth

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

nominal interest rate

What is the Ricardo Barro Effect?

1.A budget deficit increases the demand for funds. 2.Rational taxpayers increase saving, which increases the supply of funds. 3.Increased private saving finances the deficit. 4,Crowding-out is avoided