chap 27 Principles of Economics - Saving, Investment, and the Financial System

Flashcards created to review key concepts from the lecture notes on saving, investment, and the financial system.

What is the primary function of financial institutions in the economy?

To help match one person's saving with another person's investment.

What is the difference between saving and investment?

Saving is the income remaining after consumption and taxes, while investment refers to the purchase of new capital.

What financial markets allow savers to provide funds directly to borrowers?

The bond market and the stock market.

Define 'bond'.

A certificate of indebtedness that specifies the obligations of the borrower to the buyer of the bond.

What effect does a budget deficit have on national saving?

It reduces national saving, decreases the supply of loanable funds, raises the interest rate, and leads to lower investment.

What is the formula for GDP?

Y = C + I + G + NX, where Y is GDP, C is consumption, I is investment, G is government purchases, and NX is net exports.

What distinguishes closed and open economies?

A closed economy does not interact with other economies and has NX = 0, while an open economy interacts with other economies with NX ≠ 0.

What is 'crowding out' in the context of government borrowing?

A decrease in investment that results from government borrowing.

How does a tax incentive for saving affect the interest rate and investment?

It lowers interest rates and increases investment.

What is a mutual fund?

An institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds.

What is the relationship between interest rates and the quantity demanded of loanable funds?

As interest rates rise, the quantity demanded of loanable funds decreases.

What is meant by 'equilibrium' in the loanable funds market?

The point where the supply and demand for loanable funds balance, determining the interest rate.

What happens if the interest rate is below equilibrium in the loanable funds market?

There will be a shortage of loanable funds, prompting lenders to raise the interest rate.

Define 'public saving'.

Tax revenue that the government has left after paying for its spending.