ECON 1BB3 Lecture 15: lecture 15

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apricotelephant517

9 Feb 2012

School

McMaster University

Department

Economics

Course

ECON 1BB3

Professor

Bridget O' Shaughnessy

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ECON 1BB3 Full Course Notes

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Financial institutions: financial markets (directly link borrowers and savers) y bond market, loan, large businesses, governments, term, risk y stock market. bankruptcy laws: financial intermediaries (indirect link between savers and borrowers) y banks, provide loans, deposits from savers y mutual funds, people with small amounts of money to buy stocks together. Saving and investment y national income accounting identity: private saving: sg = t-g y budget surplus: t>g y budget deficit: g>t y national income accounting identity: y=c+i+g, y-c-g=i, s=i y definition of saving, s= sp=sg, sp= y-t-c, sg= t-g, s=y-t-c+t-g, s=y-c-g. Market for loanable funds y slope; shift factors y demand: negative slope, firms must borrow to invest y supply. Interest rate rises, borrowing more expensive: positive slope, households: higher interest rate every dollar saved now= more future consumption, public saving does not depend on the interest rate y market for loanable funds s(saving) sp+ sg.

Related Questions

The economy's two most important financial markets are

A. the investment market and he saving market
B. the bond market and the stock market
C. banks and the stock market.
D. financial markets and financial institutions

blushraccoon42

6. If there is a shortage of loanable funds, then

a.	the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.
b.	the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
c.	the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
d.	the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

7. We associate the term debt finance with

a.	the bond market and we associate the term equity finance with the stock market.
b.	the stock market and we associate the term equity finance with the bond market.
c.	financial intermediaries and we associate the term equity finance with financial markets.
d.	financial markets and we associate the term equity finance with financial intermediaries.

8. If the demand for loanable funds shifts to the right, then the equilibrium interest rate

a.	and the quantity of loanable funds rises.
b.	and the quantity of loanable funds falls.
c.	rises and the quantity of loanable funds falls.
d.	falls and the quantity of loanable funds rises.

9. Long-term bonds are

a.	riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
b.	riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
c.	less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
d.	less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

10. Compared to bondholders, stockholders

a.	face higher risk and have the potential for higher returns.
b.	face higher risk but receive a fixed payment.
c.	face lower risk and have the potential for higher returns.
d.	face lower risk but receive a fixed payment.

11. The old adage, 'don't put all your eggs in one basket', is very similar to a modern bit of advice concerning financial matters:

a.	Buy low-risk bonds.
b.	Use a medium of exchange.
c.	Diversify.
d.	Intermediate.

12. A budget surplus is created if

a.	the government sells more bonds than it buys back.
b.	the government spends more than it receives in tax revenue.
c.	private saving is greater than zero.
d.	None of the above is correct.

greenwildebeest673

Use the market for loanable funds to explain what happens to 1) private savings (PS) 2) private investment spending (PI) and 3) the interest rate (r) if each of the following events occur:

Case 1: The government decides to invade and occupy a Middle Eastern nation, which causes government spending to rise.

Case 2: At any given interest rate, businesses become very optimistic about the future profitability of investment spending.

Case 3: Home prices begin declining at a rapid rate, making homeowners feel poorer. This perception causes them to spend less and save more at any interest rate than they did previously.

Case 4: The government imposes a new tax on the financial capital inflow from other nations. Because of this, the economy will have a much harder time attracting international capital.

ECON 1BB3 Lecture 15: lecture 15

ECON 1BB3 Full Course Notes

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