ECON CH 7

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financial institution

a firm that operates on both sides of the markets for financial capital. A financial institution is a borrower in one market and a lender in the other.

Consider a payment of ​$400​, which will be made three years in the future. The interest rate is 3 percent. The present value of this payment is ​$___

present value= future value / (1 + r)^n

Real interest rate

the nominal interest rate adjusted to remove effects of inflation on buying power of money, and is approximately equal to the nominal interest rate minus inflation rate.

Nominal interest rate

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.

stock

A certificate of ownership in a corporation and claim to the firm's profits

How can the change in U.S. wealth differ from U.S.​ saving? A.The change in wealth includes changes in the prices of assets owned and saving excludes these items. B.The change in wealth always equals saving. C.The change in wealth equals income minus​ consumption, which is not equal to saving. D.Saving exceeds the change in wealth when consumption expenditure exceeds income

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

The loanable funds market is the aggregate of all the individual​ _____ markets. A.financial B.commodity C.auction D.labo

A.financial

Saving is the amount of income that is​ _____ in net taxes or spent on​ _____ goods and services. A.not​ paid; consumption B.paid; consumption C.not​ paid; capital D.paid; capital

A.not​ paid; consumption

A stock is a certificate of​ _____ and claim to the​ _____ that a firm makes. A.ownership; profits Your answer is correct. B.saving; profits C.deposit; loans D.secured​ loan; revenues

A.ownership; profits

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​ ______. A.rises; increases,​ decreases, or remains the same B.falls; decreases C.rises, falls, or remains the​ same; increases D.rises, falls, or remains the​ same; increases,​ decreases, or remains the same

A.rises; increases,​ decreases, or remains the same

The demand for loanable funds is the relationship between​ _____ demanded and the​ _____ when all other influences on borrowing plans remain the same. A.the quantity of loanable​ funds; real interest rate B.the quantity of​ capital; real interest rate C.loanable​ funds; real interest rate D.loanable​ funds; real wage rate

A.the quantity of loanable​ funds; real interest rate

Daisy loans Alfred​ $10,000 and a year​ later, Alfred pays Daisy​ $10,400. If the inflation rate during that year is 1.5​ percent, what is the real interest rate that Alfred is paying to​ Daisy? The real interest rate that Alfred is paying to Daisy is​ _______. A.5.5 percent a year B.2.5 percent a year C.2.7 percent a year D.unknown

B.2.5 percent a year

A government budget deficit​ _______ loanable funds. A.decreases the supply of B.increases the demand for C.decreases the demand for D.increases the supply of

B.increases the demand for

A government budget surplus​ _______ loanable funds. A.decreases the supply of B.increases the supply of C.increases the demand for D.decreases the demand for

B.increases the supply of

A government budget surplus​ _______ the real interest​ rate, decreases​ ______. A.raises; ​investment, and increases private saving B.lowers; private​ saving, and increases investment C.lowers; ​investment, and increases private saving D.raises; private​ saving, and increases investment

B.lowers; private​ saving, and increases investment

The ​crowding-out effect is the tendency for a government budget deficit to raise the​ _____ and​ _____ investment. A.real wage​ rate; decrease B.real interest​ rate; decrease C.price​ level; increase D.quantity of​ output; increase

B.real interest​ rate; decrease

The risk that a​ borrower, also known as a​ creditor, might not​ _____ is called credit risk or default risk. A.pay the specified interest rate B.repay a loan C.buy insurance D.send information to lender

B.repay a loan

What determines the supply of loanable funds and what makes it​ change? The supply of loanable funds is determined by the​ _________. The supply of loanable funds changes when​ _______. A.decisions of financial​ institutions; the real interest rate changes B.saving decisions of​ households, which are influenced by the real interest​ rate, disposable​ income, expected future​ income, wealth, and default​ risk; disposable​ income, expected future​ income, wealth, or default risk change C.saving decisions of​ households, which are influenced by the real interest​ rate, disposable​ income, expected future​ income, wealth, and default​ risk; the real interest rate changes D.demand for loanable​ funds; the demand for loanable funds change

B.saving decisions of​ households, which are influenced by the real interest​ rate, disposable​ income, expected future​ income, wealth, and default​ risk;

The supply of loanable funds is the relationship between​ _____ supplied and the​ _____ when all other influences on lending plans remain the same. A.loanable​ funds; real interest rate B.the quantity of loanable​ funds; real interest rate C.the quantity of​ capital; real interest rate D.loanable​ funds; real wage rate

B.the quantity of loanable​ funds; real interest rate

If the annual interest paid on a​ $500 loan is​ $25, the nominal interest rate is​ _____ percent per year. If the nominal interest rate is 5 percent per year and the inflation rate is 2 percent a​ year, the real interest rate is​ _____ per year. A.4; 4 B.3; 5 C.5; 3 D.5; 7

C.5; 3

Net worth is the total market value of what a financial institution has​ _____ minus the market value of what it has​ _____. A.spent; earned B.lent; spent C.lent; borrowed D.earned; saved

C.lent; borrowed

Net present value is the​ _______. A.present value of the marginal benefit from a financial decision minus its marginal cost B.present value of all the future flows of money that arise from a financial decision divided by the number of years until a profit is expected from the decision C.present value of all the future flows of money that arise from a financial decision minus the initial cost of the decision D.future value of a decision divided by​ (1 + r​)

C.present value of all the future flows of money that arise from a financial decision minus the initial cost of the decision

How do changes in the demand for and supply of loanable funds change the real interest rate and quantity of loanable​ funds? 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​ ______. A.falls; increases B.rises; increases,​ decreases, or remains the same C.rises, falls, or remains the​ same; increases D.falls; decreases

C.rises, falls, or remains the​ same; increases

State the financial decision​ rule: If the net present value is positive​ _______ and if the net present value is negative​ _______. A.invest more​ money; invest less money B.do not take the action until the interest rate​ rises; do not take the action until the interest rate falls C.take the​ action; do not take the action D.hire more​ workers; hire fewer workers

C.take the​ action; do not take the action

The net present value is the​ _______ flows of money from a financial decision minus​ _____ . A.total; total cost arising from the decision B.future; the cost of the decision C.value today of all​ future; the initial cost of the decision D.future value of​ all; the cost of making the decision

C.value today of all​ future; the initial cost of the decision

A financial institution is a firm that operates on both sides of the markets for​ _____: It​ _____ in one market and​ _____ in another. A.investments; buys; sells B.profits; earns; spends C.loans; lends; saves D.financial​ capital; borrows; lends

D.financial​ capital; borrows; lends

How do households make saving​ decisions? The​ _______, the greater is the amount that a household decides to save. A.smaller a​ household's expected future income and the greater a​ household's wealth B.higher the expected profit and the greater a​ household's disposable income C.smaller the default risk and the greater a​ household's wealth D.greater a​ household's disposable income and the smaller a​ household's expected future income

D.greater a​ household's disposable income and the smaller a​ household's expected future income

A government budget deficit​ _______ the real interest​ rate, increases​ ______. A.lowers; private​ saving, and decreases investment B.raises; ​investment, and decreases private saving C.lowers; ​investment, and decreases private saving D.raises; private​ saving, and decreases investment

D.raises; private​ saving, and decreases investment

stock market

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

mortgage

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 (repayments and interest)

bond

a promise to make specified payments on specified dates

bond market

bonds issued by firms and governments are traded here // Ex: US Treasury

wealth is the value of all the things that people____ a. spend b. save c. own d. demand

c. own

financial capital

consists of the funds that firms use to buy physical capital... and that households use to buy a home or to invest in human capital

Net worth

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

finance

describes lending and borrowing

mortgage- backed- security

entitles its holder to the income form a package of mortgages

net investment

equals gross investment minus depreciation

The financial decision rule is

if the net present value is positive, do it! If the net present value is negative, don't do it!

Net present value

is the present value of all the future flows of money that arise from a financial decision, minus the initial cost of the decision.

Joe has a term deposit that pays 5 percent a year and its value after two years will be ​$2,000. What is the present value of​ Joe's term​ deposit?

present value= future value / (1 + r)^n

What is the present value of $250​, three years in the future if the interest rate is 4 percent?

present value= future value / (1 + r)^n

Loanable funds market

the aggregate of all the individual financial markets.

saving

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

Federal Reserve System (the Fed)

the central bank of the US, a public authority whose main role is the regulation of banks and money.

Supply of loanable funds

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

Default risk

the risk that a loan will not be repaid

National saving

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

Net taxes

the taxes paid to governments minus the cash transfers received from governments (such as Social Security and unemployment benefits). So income is equal to the sum of consumption expenditure, saving, and net taxes:

gross investment

the total amount spent on new capital

wealth

the value of the things that people own

physical capital

tools, instruments, machines, buildings, and inventories

A mortgage is a legal contract that gives ownership of a​ _____ to the​ _____ in the event that the​ _____ fails to meet the agreed loan payments​ (repayments and​ interest). A.car; lender; borrower B.home; lender; borrower C.car; borrower; lender D.home; borrower; lender

​B.home; lender; borrower


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