Econ 105 Macroeconomics: Chapter 8

Check slides, some graphs/ formulas u need to know

FINANCIAL SYSTEM

group of institutions in the economy that help to match one person’s savings with another person’s investment.

FINANCIAL MARKETS

are financial institutions through which savers can directly provide funds to borrowers.

BOND

certificate of indebtedness that specifies the obligation of the borrower to the holder of the bond.

STOCK

represents ownership in a firm and is, therefore, a claim to its profits.

EQUITY FINANCE

the sale of a stock to raise money. ▪ The prices at which shares trade on stock exchanges are determined by the supply and demand for the stock.

STOCK INDEX

an average of a group of stock prices. ▪ Dow Jones Industrial Average ▪ S&P/TSX Composite Index

FINANCIAL INTERMEDIARIES

financial institutions through which savers can indirectly provide funds to borrowers 

BANK

the primary function of a bank is to take deposits from savers and use these deposits to make loans to people who want to borrow 

MUTUAL FUNDS

an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds ▪ Allows diversification ▪ Access to the skills of professional money managers

ACCOUNTING

refers to how various numbers are defined and added up

NATIONAL SAVINGS (S)

total income in the economy that remains after paying for consumption and government purchases.

BUDGET DEFICIT

T<G

BUDGET SURPLUS

T>G

MARKET FOR LOANABLE FUNDS

the market in which those who want to save supply funds and those who want to borrow to invest demand funds.

Saving

is the source of supply for loanable funds.

Investment

is the source of demand for loanable funds.

INTEREST RATE

is the price of a loan.

INVESTMENT TAX CREDIT

gives a tax advantage to any firm building a new factory or buying a new piece of equipment

GOVERNMENT DEBT

the sum of past budget deficits and surpluses.

CROWDING OUT

decrease in investment that results from government borrowing.

VICIOUS CIRCLE

the cycle that results when deficits reduce the supply of loanable funds, increase interest rates, discourage investment, and result in slower economic growth; slower growth leads to lower tax revenue and higher spending on income-support programs, and the result can be even higher budget deficits

VIRTUOUS CIRCLE

the cycle that results when surpluses increase the supply of loanable funds, reduce interest rates, stimulate investment, and result in faster economic growth; faster growth leads to higher tax revenue and lower spending on income-support programs, and the result can be even higher budget surpluses