Macro - Chapter 7

capital

the tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services.

financial capital

funds that firms use to buy physical capital

gross investment

total amount spent on purchases of new capital and on replacing depreciated capital.

depreciation

the decrease in the quantity of capital that results from wear and tear and obsolescence

net investment

change in the quantity of capital.

wealth

the value of all the things that people own

savings

amount of income that is not paid in taxes or spent on consumption of goods and services

What are the three types of financial markets

• loan markets

• bond markets

• stock markets

financial institution

a firm that operates on both sides of the market for financial capitl It is a borrower in one market and a lender in another

Where do the funds for financial markets come from?

• household savings - s

• government budget surplus

• borrowing from the rest of the world

What does the quantity of loanable funds demanded depend on?

1. the real interest rate

2. expected profit

What does the quantity of loanable funds supplied depend on?

1. the real interest rate

2. disposable income

3. expected future income

4. wealth

5. default risk

What does an increase in expected profit do to the demand for funds today?

the demand increases resulting in a shift right for the demand for loanable funds

What happens to the supply of loanable funds if savings increases?

The supply for loanable funds would shift to the right leading to a fall in the real interest rate

What does a government budget surplus do?

It increases the supply of funds resulting in a shift rightward

What does a government budget deficit do?

A government budget deficit means that the borrowing has increased meaning that there is a shift right in the demand for loanable funds