econ chpt 9 Saving, investment, and the financial system

Interest Rate

the _______ represents the price of a loan

Owner's Equity

the difference between the value of an asset and the amount of money owed. How much would be left if the property was sold?

Market for loanable funds

the interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged

demand

the source of the ______ for loanable funds is investment

supply

the source of the______ for loanable funds is saving

Macroeconomics

the study of fluctuations in the overall economy

retirement

when income goes to zero

suppose the government changes the tax code to allow additional amounts of money to be placed in 401K retirement accounts, increasing the extent to which people can delay their tax obligation. What was the result?

Private investment would increase as the cost of borrowing decreased

jack wants to borrow money to create a cowboy-themed inflatable bounce house but the government is running a defecit which has increased interst rates so much that jack can no longer afford to borrow the money

example of crowding out pertaining to macroeconomics

shadow banking system

non-banking financial firms that act as banks by borrowing and lending in an effort to make a profit

Financial intermediaries

reduce the costs of moving savings from savers to borrowers and investors

Calopolis, a college town in Northern California, has for many years banned the presence of fast food restaurants in city limits. As of 2012, however, the city will allow several fast food companies to open franchised locations Does this cause a shift in supply or demand

shift in demand

due to an increase in revenues after a tax hike, the US is able to eliminate the deficit and begin to maintain a balanced budget for the first time in several decades Does this cause a shift in supply or demand

shift in demand

China decides to reduce its capital investment in the United States as it expects low returns do to a weak U.S. economy Does this cause a shift in supply or demand

shift in supply

as a result of a stock market boom, individuals begin to feel richer and spend more money while also saving less Does this cause a shift in supply or demand

shift in supply

what decreases interest rate

- an increase in savings - a decrease in investor optimism

What increases interest rates

- an investment tax credit - an increase in large investments

Crowding Out

- decrease in private consumption and investment that occurs when government borrows more - increases interest rates

Long term bond purchased for $95,000 per bond and pays $8,3600 annually what is the annual interest rate on this bond?

8360/95000 x 100 = 8.8%

suppose that the government is concerned with the unemployment rate and, as a response, offers a tax credit to any firm that builds a new factory in the US. What is the effect of this policy on the market for loanable funds?

Demand will increase

example of financial intermediaries

a financial institution that transforms investors funds into financial assets

zero-coupon bond with little risk that costs $950 and will pay $1070 in one year OR savings account with annual interest rate of 12% a. which is preferable? b. what is the rate of return?

a. zero-coupon bond b. rate of return = 1070-P(price)/P x 100

consumption smoothing

borrowing in periods of low income and saving in periods of high income to make consumption less variable than income