Chapter 13
crowding out
a decrease in investment that results from government borrowing
Which of the following policy actions would unambiguously reduce the supply of loanable funds and crowd out investment?
a decrease in taxes together with an increase in government spending
bond
a formal contract to repay borrowed money with interest at fixed intervals
recession
a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.
budget deficit
a situation in which the government spends more than it takes in If t-g is negative
Borrowers
acquire capital to produce goods and services in the future
loanable funds
all income that people have chosen to save and lend out, rather than use for their own consumption, and to the amount that investors have chosen to borrow to fund new investment projects
The main advantage of mutual funds is that they provide
an easy way to hold a diversified portfolio
Budget Surplus
an excess of tax revenue over government spending. If T-G is positive
mutual fund
an investment program funded by shareholders that trades in diversified holdings and is professionally managed.
investment incentives
an investment tax credit increases the demand for loanable funds ...which raises the equilibrium interest rate and increases the equilibrium quantity of loanable funds
real interest rate
-the nominal interest rate minus the inflation rate; also called the inflation adjusted interest rate
A closed economy has income of $1,000, government spending of $200, taxes of $150, and investment of $250. What is private saving?
1. Y-C-G=I 2. 1000-C-200=250 3. C= 550 4. Private Saving= Y-T-C 5. 1000-150-550= 300 Answer: 300
Saving
= Investment S= (Y-T-C)+(T-G)
The slope of the demand curve
A fall in the interest rate reduces the cost of borrowing, which increases the quantity of loanable funds demanded. demand = investment
stock
A share of ownership in a corporation.
The slope of the supply curve
An increase in the interest rate makes saving more attractive, which increases the quantity of loanable funds supplied.
Carly wants to buy and operate an ice-cream truck but doesn't have the financial resources to start the business. She borrows $20,000 from her friend Freddie, to whom she promises an interest rate of 7 percent, and gets another $30,000 from her friend Sam, to whom she promises a third of her profits. What best describes this situation?
Sam is a stockholder, Freddie is a bond holder
saving incentives
Tax incentives for saving increase the supply of loanable funds ...which reduces the equilibrium interest rate and increases the equilibrium quantity of loanable funds
Savers
convert current income into future purchasing power
If the business community becomes more optimistic about the profitability of capital, the ________ curve for loanable funds would shift, driving the equilibrium interest rate ________.
demand, up
From 2008 to 2012, in the aftermath of the financial crisis, the ratio of government debt to GDP in the United States
increased markedly
A budget surplus
increases the supply of loanable funds reduces the interest rate and stimulates investment
Increasing public saving (surplus)
increases the supply of loanable funds, this leads to a decrease in the interest rate and increase in the quantity of loanable funds this reverses the effects of a budget deficit
A bond tends to pay high interest rate when
issued by a corporation of dubious credit quality
because a high interest rate
makes borrowing more expensive, the quantity demanded for loanable funds falls as interest rate rise -high interest rates make saving more attractive, so the quantity of loanable funds supplies rises as interest rate rise
financial markets
markets where financial securities, such as stocks and bonds, are bought and sold
higher taxes
mean less saving/investment
lower taxes
mean more saving/investment
Higher investment
means greater capital accumulation and more rapid economic growth.
If the government collects more in tax revenue than it spends, and households consume more than they get in after-tax income then
private saving is negative, but public saving is positive
The effect of a budget deficit
reduces national saving and the supply of loanable funds, increases equilibrium interest rate and decreases the equilibrium quantity of loanable funds and investment
investment is the
source of demand for loanable funds
Saving is the
supply for loanable funds
If a popular TV show on personal finance convinces Americans to save more for retirement, the ________ curve for loanable funds would shift, driving the equilibrium interest rate ________.
supply, down
Private saving
the income that households have left after paying for taxes and consumption Y-T-C
market for loanable funds
the interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged
Equilibrium
the interest rate adjusts to equate supply and demand
When the government reduces national saving by running a budget deficit
the interest rate rises and investment falls Because investment is important for long-run economic growth, government budget deficits reduce the economy's growth rate
Nominal interest rate
the monetary return to saving and the monetary cost of borrowing
if a reform of the tax laws encourage greater investment
the result would be higher interest rates and greater saving
if a reform of the tax laws encouraged greater saving
the result would be lower interest rates and greater investment
financial system
the system that allows the transfer of money between savers and borrowers
public Saving
the tax revenue that the government has left after paying for its spending T-G
