Learning Curve 29: Saving, Investment, and Financial System
the deposits of commercial banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to
$250,000
insolvency
a financial state that occurs if liabilities are greater than assets
bond
a formal contract to repay borrowed money with interest at fixed intervals
during the great depression, the number of bank failures was
a major issues, with approximately 50 percent of banks failing
financial intermediary
an institution that transforms the funds it gathers from many individuals into financial assets
time preference
The human tendency for people, because of impatience, to prefer to spend and consume in the present rather than save and wait to spend and consume in the future; this inclination varies in strength among individuals.
what condition could break the bridge between savers and borrowers?
controls on interests rates; price controls on interest rates can cause the loanable funds market to malfunction
the decrease in private consumption and investment that occurs when government borrows more is called
crowding out
arbitrage ensures that equally risky assets earn
equal returns
An investment tax credit offered during a recession is most likely to be temporary so that:
firms an incentive to invest quickly
savings
income that is not spent on consumption goods
equilibrium in the market for loanable funds determines the
interest rate and the quantity of loanable funds
what happens if investors begin to doubt the solvency of an investment bank?
it may lead the short term loans to disappear more quickly because they are rolled over on a very frequent basis
________ interest rates usually result in less __________
lower ; savings
The ________ the interest rate, the greater the quantity of funds demanded for _________.
lower; investment
in comparison to a low risk company, if a risky company wishes to borrow money, it:
must promise a higher rate of interest because lenders demand compensation for default risk
do bondholders benefit when a company's profits are high?
no, only the shareholders
safe assets tend to
offer low rate of return
the supply curve for savings is...
positively sloped
AIDS has dramatically reduced life expectancies in Africa. What impact would this have on saving rates?
reduce savings since many Africans expect to die young
when the government borrows more, some of the increased borrowing is financed by...
reduced consumption and some by reduced investment
collateral
something pledged as security for repayment of a loan, to be forfeited in the event of a default.
an investment tax credit gives firms that invest in plants and equipment a
tax break
In order to counteract the decrease in investment demand during a recession, the government sometimes offers a
temporary investment tax credit
Owner's Equity
the amount remaining after the value of all liabilities is subtracted from the value of all assets
crowding out
the decrease in private consumption and investment that occurs when government borrows more
Initial Public Offering (IPO)
the first time a company issues stock that may be bought by the general public
the price of loanable funds
the interest rate
market for loanable funds
the market where suppliers of loanable funds (savers) trade with borrowers, thereby determining the equilibrium interest rate
investment
the purchase of new capital goods; private spending on tools, plant, and equipment used to produce future output
Arbitrage
the purchase of securities in one market for immediate resale in another to profit from a price discrepancy
leverage ratio
the ratio of debt to equity, D/E
if consumers decide to save less,
the supply curve in the market for loanable funds will shift to the left
if consumers decide to save more,
the supply curve in the market for loanable funds will shift to the right; this would increase the supply of loanable funds, and the interest rate would fall
stock
A share of ownership in a corporation.
