econ 101; ch 29

t-bonds

30 yr bonds, pay interest every 6 months

stock

A certificate of ownership in a corporation; entitled to share of profits

IPO

A stock or bond sold by a corporation for the first time. Proceeds (money from sale) may be used to retire debts, build new plants or buy new equipment or for additional working capital. (Initial Public Offering).

How many of the following statements are TRUE? A.If someone buys a bond, economists would say that person is saving, not investing. B.Businesses borrow when they expect the return on their investment to be greater than the interest rate. C.The buyer of a bond is a lender. D.A national chain of grocery stores wants to finance the construction of several new stores. The firm has limited internal funds so it will likely demand the required funds by buying bonds. E.An increase in borrowing will lead to an increase in the supply of loanable funds and an increase in interest rates.

A. True B. True C. True D. False (they would sell bonds) E. False

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project A.is now lower than it was before, and so Hydro Grow is less likely to build the building. B.is now lower than it was before, and so HydroGrowis more likely to build the building. C.is now higher than it was before, and so HydroGrowis less likely to build the building. D.is now higher than it was before, and so HydroGrowis more likely to build the building.

A. is now lower than it was before, and so Hydro Grow is less likely to build the building.

At lower interest rates, the cost of investing _____ and the quantity of funds demanded for investment _____. A.decreases; increases B.increases; decreases C.increases; increases D.decreases; decreases

A.decreases; increases

The development of technical knowledge (i.e., new ideas) requires research and development. Because these new ideas can be freely shared, research into new technologies provides a A.negative externality, and too few resources are devoted to research as a result. B.positive externality, and too few resources are devoted to research as a result. C.negative externality, and too many resources are devoted to research as a result. D.positive externality, and too many resources are devoted to research as a result.

B.positive externality, and too few resources are devoted to research as a result.

Bonds

Certificates of debt that carry a promise to buy back the bonds at a higher price Lender: BUYS bonds Borrower: SELLS bond

Mario is saving if he does which of the following? A.makes a deposit in a savings account at the bank B.buys a share of stock in a computer company C.buys a corporate bond D.Each of these answers is correct.

D. Each of these answers is correct.

Investment is A.the purchase of new consumption goods. B.the purchase of shares of stock on the New York Stock Exchange. C.the purchase of gold and silver during inflationary times. D.the purchase of new capital goods.

D.the purchase of new capital goods.

supply for loanable funds

The amount of saving made available for lending at each real interest rate NOTE: higher interest rates = more savings due to OC (you will save more than consume bc of the increasing in money return in future)

zero coupon bond

a bond where you pay interest @ maturity

D

bonds in current default (bad!)

financial system

brings together savers and borrowers in a set of interconnected markets where people trade a variety of financial products.

stock market

encourages investment and economic growth

market for loanable funds; supply & demand

equilibrium is when S = I

financial intermediaries

financial institutions through which savers can indirectly provide funds to borrowers ex: banks, stock and bond markets

Banks

gather savings from depositors and transfer it to borrows ; minimizes info costs --> bank evaluates the borrower's ability to pay off loans --> the savings get redirected to the most productive users

an increase In the production function from y to y1

increase in the level of human capital and/or technological advancement NOTE: increase in capital stock does not SHIFT but movement along the curve

R&D (research and development)

is part of investment;

AAA

low risk

t-bills

mature in 2 days - 27 weeks, pay interest at maturity

borrowers

people who need money for investment [DEMAND CURVE]

savers

people who save money for future consumption; rate of return (interest) goal: get more $ back that what they lent [SUPPLY CURVE]

if the discounted rate of future revenue is less than the present value

ppl will NOT borrow

if the discounted rate of future revenue is greater than the present value

ppl will borrow

___________ is an important determinant of capital accumulation and economic growth

savings

Types of bonds

t-bonds, t-notes and t-bills

future value

the amount of money in the future that an amount of money today will yield, given prevailing interest rates

Present Value (PV)

the current value of future cash flows discounted at the appropriate discount rate

The higher the risk

the greater the interest rate required to get lenders to buy the bonds

market for loanable funds

the market in which those who want to save supply funds and those who want to borrow to invest demand funds

demand for loanable funds

the relationship between the quantity of loanable funds demanded and the real interest rate when all other influences on borrowing plans remain the same INVERSE RELATIONSHIP DEMAND CURVE = BORROWERS

spillovers mean

there is too little investment in R&D

t-notes

2-10 year maturity, interest every 6 months

change in supply for loanable funds

1. increase Tax rate on savings income will DECREASE SUPPLY bc it reduces the incentive to save and rather pushes to consume

change in demand for loanable funds

1. investment tax credit will INCREASE DEMAND (purchasing capital is cheaper for firms) 2. Government borrowings (additional borrower) will INCREASE DEMAND

How many of the following events will cause investment to increase? A.A technological change increases the profitability of new investment to firms. B.Research shows that watching the cartoon SpongeBob SquarePantscan shorten a child's attention span. Assume that an entire generation of children grows up watching this cartoon, resulting in adults who are less patient (their time preference has increased, i.e. they put more value on money received today versus money received later). C.The government cuts taxes and increases military expenditures which causes the federal deficit to increase. D.Congress decreases the tax rate on income earned from savings.

2 (A+C)

How many of the following events will cause the demand for loanable funds to increase? A.A technological change increases the profitability of new investment to firms. B.Research shows that watching the cartoon SpongeBob SquarePantscan shorten a child's attention span. Assume that an entire generation of children grows up watching this cartoon, resulting in adults who are less patient (their time preference has increased, i.e. they put more value on money received today versus money received later). C.The government cuts taxes and increases military expenditures which causes the federal deficit to increase. D.Congress decreases the tax rate on income earned from savings.

2 (A+C)

Which of the following government policies is most likely to discourage economic growth? A.subsidies for companies that use a lot of capital in their production process. B.An investment tax credit, i.e. allow firms to deduct a certain percentage of their investment costs from their taxes. C.high taxes on companies that spend a lot on capital accumulation. D.promotion of education and training programs for workers.

C.high taxes on companies that spend a lot on capital accumulation.