CH 10: SAVING AND INVESTMENT
FALSE
A bubble is a large decrease in asset prices caused by unrealistic expectations about future prices. True False
B
A random walk occurs when an asset price: A. moves in a predicable direction but with random error. B. makes unpredictable movements. C. moves in a predictable way with no error. D. moves slowly but predictably.
A
Assume that I = SPrivate + SGovernment + (IM - X). Furthermore, let's say that imports are equal to exports. In this case, private savings: A. plus government saving are equal to investment. B. plus government savings exceed investment. C. exceed investment. D. plus government saving are less than investment.
D
Businesses will undertake projects if the rate of return is: A. less than the cost of borrowing for the project. B. positive. C. greater than 1. D. greater than or equal to the interest rate levied on the loan.
changes in perceived business opportunities
For instance a new business opportunity that seems to be profitable, can create more demand for loans by people to start that business.
B
If a country has a trade surplus, we can conclude that it also has: A. a budget surplus. B. a net capital outflow. C. a net capital inflow. D. a budget deficit.
A
In the loanable funds market, borrowers: A. are best represented by the demand for loanable funds. B. are not affected by changes in the inflation rate. C. lose money to unexpected increases in the inflation rate. D. are best represented by the supply of loanable funds.
D
National savings equals: A. trade balance plus the budget balance. B. private savings plus consumption spending. C. government spending plus taxes. D. private savings plus the budget balance.
changes in private savings behavior
People sometimes may want to spend more and save less.
Real interest rate
Real interest rate = nominal interest rate - inflation rate.
FALSE
The expenses involved in actually putting together and executing a deal are called liquidity costs. False True
C
The government's budget deficit increases, and at the same time the trade deficit grows. This will lead to a(n) _____ in the demand and a(n) _____ in the supply of loanable funds in domestic markets. A. decrease; increase B. decrease; decrease C. increase; increase D. increase; decrease
B
The term liquidity means that the: A. asset is used in a barter exchange. B. asset is readily convertible to cash without much loss of value. C. asset is used as the medium of exchange. D. market interest rate is too low.
C
When a corporation borrows money from lenders in exchange for a fixed share of the firm's assets and potential profits, the corporation is: A. liquidating a bank deposit. B. taking out a loan. C. issuing stocks. D. issuing bonds.
changes in net capital inflows
When investors perception of a country change, they may decide to invest or withdraw their investment from the country.
D
Which of the following is NOT one of the three tasks of a financial system? A. risk management B. provision of liquidity C. reduction of transaction costs D. determination of fiscal policy
C
Which of the following is the index that includes the most companies and provides the broadest measure of stock market performance? A. the NASDAQ B. the producer price index C. the S&P 500 D. the Dow Jones Industrial Average
wealth
a household's __________ is the balue of its accumulated savings
loanable funds market
a hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders.
fisher effect
according to the __________ an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged
efficient markets hypothesis
according to the ____________ asset prices embody all publicly available information.
liquid
an asset is ____________ if it can be quickly converted into cash without much loss of value
illiquid
an asset is ____________ if it cannot be quickly converted into cash without much loss of value.
transaction costs
are the expenses of negotiating and executing a deal
Financial Markets
are where households invest their current savings and accumulated savings, or wealth, by purchasing financial assets.
Financial markets
channel the savings of households to businesses that want to borrow in order to purchase capital equipment.
Physical capital
consists of manufactured resources, such as buildings and machines.
budget deficit
excess of government spending over tax revenue. This will result in a dissaving's for government
budget surplus
excess of tax revenue over government spending. This will result in a savings for government.
changes in government borrowing
excessive borrowing by government will create more demands for loanable funds but it may have a crowing out effect as well.
mutual fund
financial intermediary that builds a stock portfolio and resells shares of this portfolio to individual investors.
diversification
investing in several assets with unrelated, or independent, risks; reduces risk.
bank deposit
is a claim on a bank that obliges the bank to give the depositor his or her cash when demanded
bank
is a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investment spending needs of borrowers
financial asset
is a paper claim that entitles the buyer to future income from the seller
liability
is a requirement to pay income in the future. ex loan
physical asset
is a tangible object that can be used to generate future income.
pension fund
is a type of mutual fund that holds assets in order to provide retirement income to its members
loan backed security
is an asset created by pooling individual loans and selling shares in that pool
financial intermediary
is an institution that transforms the funds it gathers from many individuals into financial assets
Financial capital
is funds from savings that are available for investment spending.
Present value
is the amount of money needed today to receive a given amount of money at a future date given the interest rate.
budget balance
is the difference between tax revenue and government spending
Human capital
is the improvement in the labor force generated by education and knowledge.
random walk
is the movement over time of an unpredictable variable
capital inflow
is the net inflow of funds into a country
interest rate
is the price, calculated as a percentage of the amount borrowed, charged by lenders to borrowers for the use of their savings for one year.
Net capital inflow
is the total flow of funds into a country minus the total flow of funds out of a country.
financial risk
is uncertainty about future outcomes that involve financial losses and gains
crowding out
occurs when a government deficit drives up the interest rate and leads to reduced investment spending
savings-investment spending identity
savings and investment spending are always equal for the economy as a whole
life insurance company
sells policies that guarantee a payment to a policy holders beneficiaries when the policy holder dies
national savings
the sum of private savings and the budget balance, is the total amount of savings generated within the economy