Finance, Saving, and Investment

These flashcards cover key concepts related to finance, saving, and investment from the lecture notes.

What are the flows of funds through financial markets and institutions?

The flows of funds refer to how savings and investments interact within financial markets and institutions, facilitating the movement of money from savers to borrowers.

Define gross investment.

Gross investment is the total amount spent on purchases of new capital and on replacing depreciated capital.

What is net investment?

Net investment is the change in the quantity of capital, calculated as gross investment minus depreciation.

What influences the real interest rate in the loanable funds market?

Government deficit or surplus influences the real interest rate by affecting the supply and demand for loanable funds.

Differentiate between physical capital and financial capital.

Physical capital consists of the tools and machines used for production, while financial capital refers to the funds used to purchase physical capital.

What effect does an increase in expected profit have on the demand for loanable funds?

An increase in expected profit leads to a greater demand for loanable funds, as more investment is anticipated.

How does a government budget surplus impact supply and demand in the loanable funds market?

A government budget surplus increases the supply of funds, leading to a decrease in the real interest rate.

What is the role of financial institutions in the financial capital market?

Financial institutions act as both borrowers and lenders, facilitating the flow of funds within financial markets.

What defines the equilibrium in the loanable funds market?

Equilibrium occurs when the quantity of loanable funds demanded equals the quantity supplied at a specific real interest rate.

How is the real interest rate calculated?

The real interest rate is calculated as the nominal interest rate minus the inflation rate.