Financial Institutions and Economic Principles

Flashcards covering financial systems, accounting identities, and economic policies.

What is a financial system?

A network of institutions that facilitate the flow of savings from savers to investors.

Give examples of financial markets.

The bond market and the stock market.

What role do financial intermediaries play?

They facilitate indirect funding by pooling funds from savers and providing them to borrowers.

Name an element of financial crises.

Large decline in asset prices, insolvencies at financial institutions, decline in confidence in financial institutions, credit crunch, economic downturn or vicious circle.

What is the accounting identity related to investments?

An asset or item acquired with the goal of generating income or appreciation over time.

How do banks function as financial intermediaries?

Banks pool funds from savers and lend them to borrowers (e.g., entrepreneurs), facilitating the flow of funds from savers to investors.

What is the potential impact of lender hesitancy on the economy?

Lenders become worried borrowers may not pay them back in the future, leading to less investments and overall economic activity.

What is the formula for GDP (Y)?

Y = C + I + G + NX

What is the formula for National Saving (S)?

S = Y – C – G

What is private saving?

Income left after taxes and consumption. Private Saving = Y – T – C

What is public saving?

Tax revenue left after government spending. Public Saving = T – G

What is investment in economic terms?

The acquisition of new capital assets, crucial for economic growth and development.

What is the Market for Loanable Funds?

A supply-demand model that explains how financial markets coordinate saving and investment.

Where does the supply in the loanable funds market come from?

Saving and public saving.

Where does the demand in the loanable funds market comes from?

Arises from investment by firms and households.

How is equilibrium achieved in the loanable funds market?

The interest rate adjusts to balance supply and demand, ensuring equilibrium in the Market for Loanable Funds.

How do saving incentives affect the market?

Tax incentives can increase saving and lower interest rates.

How do investment incentives affect the market?

Policies like investment tax credits can stimulate demand for funds and raise interest rates.

How do persistent budget deficits impact the economy?

They can strain the economy by absorbing funds that could otherwise be invested in productive activities, leading to higher interest rates and crowding out private investment.

Why is prudent debt management important?

To mitigate the risks associated with growing government debt and ensure sound fiscal management.