Econ Chapter 9

अब Quizwiz के साथ अपने होमवर्क और परीक्षाओं को एस करें!

Explain why without a well-functioning loanable funds market, future GDP dries up

-future GDP depends on spending today for necessary resources -this spending comes before any revenue is gained from the sale of output -therefore, firms must borrow in order to generate future GDP (this is why the loanable funds market is so important to the entire economy)

List some household suppliers of loanable funds

-if you have a checking or savings account at a bank -household savings in retirement accounts -stocks -bonds -mutual funds

In a loanable funds market: -good -price -demanders (consumers) -suppliers (sellers)

-loanable funds -interest rate -borrowers who want to invest -savers

What are 3 factors that shift the supply curve for loanable funds? (when these factors change, what happens?)

1) income and wealth 2) time preferences 3) consumption smoothing (when these factors change, the supply curve shifts)

Why do we use the nominal interest rate? (2 reasons)

1) the nom interest rate is the stated interest rate - the rate you read about and consider in actual financial transactions 2) low and steady inflation means that the difference between real and nom interest rates doesn't fluctuate much

Interest rates on savings accounts in the US today are typically less than:

2%

Equilibrium helps to clarify an important principal:

Investment requires saving because every dollar borrowed requires a dollar saved

Output (GDP) requires _________, ___________ requires ___________, _________ requires __________. (what do they all require?)

Output (GDP) requires investment, investment requires borrowing, borrowing requires savings. (all the links in this chain require a loanable funds market that efficiently channels funds from savers to borrowers)

Irving Fisher

The economist who formulated the relationship between inflation and interest rates The fisher equation is named after this dude

if a relatively large population group moves out of the prime earning years and into retirement, the supply of loanable funds will ______

decrease (this is whats happening in the US right now)

Every dollar borrowed, requires a

dollar saved (without savings we cannot sustain future production)

Describe a typical economic life cycle (income)

early in life income levels are low income generally rises through midlife (prime earning years) as people near retirement, their income levels fall again

The loanable funds market, like other markets, naturally tends to move toward ________, where:

equilibrium, where supply = demand

Primary borrowers of loanable funds

firms (in this chapter)

The demanders/borrowers of loanable funds include:

firms and governments

Financial markets are where:

firms and governments obtain financing or funds for their operations (these funds come primarily from household savings across the economy)

Explain why without savings, the economy cannot grow

for an economy to grow overtime, someone has to invest in capital that helps to produce more in the future but investment requires savings

Investment in capital yields ________ _______, which in turn ______ the _________ _____ _______

greater returns; increases the demand for loans

The higher the interest rate, the __________ is the incentive to ________.

greater; save

The nominal interest rate

is the interest rate before it is corrected for inflation, it is the stated interest rate

The real interest rate

is the interest rate that is corrected for inflation, it is the rate of return in terms of real purchasing power

The loanable funds market

is the market where savers supply finds for loans to borrowers

Strongest time presences = Weaker time presences =

least patient people person has more patience

The US financial markets are often considered ____ ___ than other global markets because: (so therefore....)

less risky, the size and relative robustness of the US economy (therefore, as global economies have grown, there has been an increase in foreign savings in the US)

While we recognize that savers and borrowers care about the real interest rate, the current inflationary environment throughout much of the developed world leaves us:

little to no gain by focusing on the real interest rate

In economics, we analyze financial market in the context of:

loanable funds market

Explain what happened from 1980 to 2007 when real estate and stock market values rose significantly

many people shifted their personal savings into these assets (recognizing these alternative paths to future wealth) result: the personal savings rate, as officially measured, plummeted

If time preferences increase, people will become _____ _____, which will ________ the supply of loanable funds

more impatient; reduce

The fact that you are a college student demonstrates that you are:

more patient than some others who chose instead to work for more income now

If peoples time preferences fall, if they become _____ _______, the supply of loanable funds will __________ (increase/decrease)?

more patient; increase

Consumption smoothing

occurs when people borrow and save to smooth consumption over their lifetime (is accomplished with the help of the loanable funds market)

Dissaving

occurs when people withdraw funds from their perviously accumulated savings

If a significant portion of the population leaves the prime earning years at the same time:

overall savings will fall

Because people have time preferences, someone must:

pay them to save

Example of people with very strong time preferences:

people may not go to college, since the returns to getting a college education are not typically realized until years later (time spent in college is time that could have been spent earning income)

Almost all interest rates in the US economy are determined _________ by

privately, the market forces of supply and demand

Lower interest rates lead to a greater

quantity demanded of loanable funds

List gains not counted in personal savings

real estate gains, the gains from purchases of stocks and bonds

Time preferences

refers to the fact that people prefer to receive goods and services sooner rather than later

Midlife or the prime earning years is the time to:

repay loans and save for retirement (during this period the income line exceeds the consumption line and people save)

Profit-maximizing firms borrow to fund an investment if and only if the expected __________ _____ ______ ____________ is:

return on the investment is greater than the interest rate on the loan

All else equal, people with strong time preferences _______ _____ than people with weaker time preferences

save less

If todays working Americans are more focused on instant gratification, they:

save less

The supply of loanable funds might decrease: if income and wealth decline, people will:

save less across all interest rates

As nations gain wealth, they:

save more

In a loanable funds market "Supply" =

savings

What constitutes the supply of loanable funds?

savings

Equilibrium occurs when:

savings = investment

While time preferences are generally ______ over time, if the rate of time preference in a society changes, what happens?

stable, the supply of loanable funds shifts

The loanable funds market includes places like:

stock exchanges, investment banks, mutual fund firms, and commercial banks

The lower the interest rate, the more likely a business will:

succeed in earning enough to exceed the interest it will owe at the end of the year

The fisher equation states

that the real interest rate equals the nominal interest rate minus the inflation rate

"If a significant portion of the population leaves the prime earning years at the same time overall savings will fall" -this is the current situation in the US because:

the baby boomers are now retiring from the work force

For borrowers the interest rate is

the cost of borrowing

Changes in capital productivity shift

the demand for loanable funds

If capital productivity or investor confidence falls:

the demand for loanable funds falls from D1 to D3

The level of demand for loans depends on

the productivity of capital

2 factors that cause shifts in the demand for loanable funds

the productivity of capital investor confidence

What is the loanable funds version of the law of supply?

the quantity of savings rises when the interest rate rises

What gives us the positive relationship between the interest rate and savings? Where is it reflected?

the quantity of savings rises when the interest rate rises reflected in the slope of the supply curve (S)

When making decisions about saving and borrowing, people care about __________ not ________

the real interest rate not the nominal interest rate

If you are a saver, the interest rate is:

the return you get for supplying funds

What is the importance of some foreign funds entering the US financial markets?

their presence will allow more opportunities for domestic firms to borrow for investment than if firms relied solely on domestic savers

When the quantity of loanable funds supplied exceeds the quantity demanded:

this imbalance leads to downward pressure on the interest rate

When the quantity demanded exceeds the quantity supplied:

this imbalance leads to upward pressure on the interest rate

Savers and borrowers care about real rate of interest on a loan because

this is the rate that describes how their funds' real purchasing power changes over the course of the loan

Who are the suppliers of funds and list the 2 included

those who save (Savers) include households and foreign entities

Where savers bring funds and make them available to borrowers

The market for loanable funds

Over the next 10-15 years US workers will enter retirement in record numbers. This means what?

an exit from the prime earning years and, consequently, much less savings

Define households

are private individuals and families (primary suppliers of loanable funds)

What gives us the negative relationship between the interest rate and quantity demanded of loans? Where is it reflected?

as the interest rate drops = larger quantity of loans demanded reflected in the slope of the demand curve (D) for loanable funds

Equilibrium in the loanable funds market occurs:

at the interest rate where the plans of savers match the plans of borrowers (where quantity supplied equals quantity demanded)

The demand for loanable funds also depends on the _______ or _______ of the investors at business firms

beliefs or expectations

When we are young we often: When we retire:

borrow and spend more than we are earning our income levels fall but spending doesn't fall by the same amount

If confidence is high, firms are more likely to:

borrow for investment at any interest rate

When capital is more productive, firms are more likely to:

borrow to finance purchases of this type of capital

Because the interest rate is a result of supply and demand in the market for loanable funds, _______ inflation rates lead to ______ ________ ______ ______ to:

higher inflation rates lead to higher nominal interest rates to compensate lenders for the loss of purchasing power

If a relatively large portion of the population moves into midlife, when savings is ________, this will __________ (increase/decrease) savings from S1 to S2.

highest; increase

We can rewrite the Fisher equation to see:

how inflation generally increases nominal interest rates

How can we use supply and demand to study the loanable funds market?

if we acknowledge that an interest rate is just the price of loanable funds, we can use supply and demand to reveal factors that make interest rates rise and fall

Define foreign entities

include foreign governments, firms and private citizens that chose to save in the US

An increase in foreign income and wealth will _________ (increase/decrease) what?

increase the supply of savings

If investor confidence rises, demand for loanable funds ____ from

increases from D1 to D2

If capital productivity increases, demand for investment _______ from

increases from D1 to D2 (demand is higher across all interests rates)

Increases in income generally produce: ______________ If income declines, people: ______ ______ These changes do what?

increases in savings save less shift the loanable funds supply curve

If capital is more productive, the demand for loans ______; if capital is less productive, the demand for loans __________

increases; decreases

For a given real interest rate, the higher the rate of _________, the higher the _______ _______ _____ will be

inflation, nominal interest rate

A price of loanable funds

interest rate

Thought of as "the opportunity cost of consumption"

interest rate

The higher the ________ ________ the greater the _________ will be in the future

interest rate; return

Firms borrow to ________, to __________________. Firms looking to ___________ must ________________.

invest, buy tools and equipment and build factories produce output in the future must borrow to pay their expenses today

In a loanable funds market "Demand" =

investment

Borrowing fuels _____, which creates _________ ________.

investment; future output

When the overall economy slows, firms often reduce ___________, since they expect reduced sales in future periods; this move reflects what?

investment; reflects a decline in investor confidence

In order to make _________, firms must ______ since they have ___ ___________ yet.

investments; borrow; no revenue

If a firm believes sales will increase in the future, it will:

invests more today to build for future sales (if it believes its future sales will fall, it invests less today)

investor confidence

is a measure of what firms expect for future economic activity

Interest rate

is a price of loanable funds, quoted as a percentage of the original loan amount

The Savings Rate

is personal saving as a portion of disposable (after-tax) income

If we have a steady flow of people moving into each stage of life, the amount of savings in the economy:

is stable and there will be a steady supply in the market for loanable funds


संबंधित स्टडी सेट्स

Writing Lab-Unit 5-Vocabulary/BrainPop

View Set

Ch. 14 - Assessing Skin, Hair, and Nails

View Set

Harry Potter and the Sorcerer's Stone

View Set

patho 2 final exam possible questions

View Set

ART 100 Ch 15: Christianity and the Formation of Europe

View Set