Macro Chap 23

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Author:
bwood190
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287253
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Macro Chap 23
Updated:
2014-10-27 23:42:30
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marco 23 test
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Marco test 2 chap 23
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  1. Finance
    providing funds to finance expenditures on capital
  2. Money
    what we use to pay for g/s
  3. Financial Capital
    funds firms use to buy physical capital
  4. Gross Investment
    total amount spent on new capital
  5. Net Investment
    • change in value of capital
    • equals gross investment minus depreciation
  6. Wealth
    • value of all things people own
    • increases when mkt value of assets rises (capital gains) vice versa
  7. Saving
    • amount of income not paid in taxes or spent on consumption g/s
    • increases wealth
  8. Loan Mkts
    • where bus. go to get short term finance to buy inventories
    • households go to finance new homes
  9. Mortgage
    funds secured by legal contract to buy homes
  10. Bond
    promise to make spcified pmts on specified dates
  11. Bond Mkt
    where issued bonds are traded
  12. Mortgage Backed Security
    • type of bond
    • holder entitled to income from package of mortgages
  13. Stock
    certificate of ownership and claim to firm's profits
  14. Stock Mkt
    fin mkt in which shares are traded
  15. Financial Institution
    firm that operates on both sides of mkts for financial capital
  16. Banks
    accept deposits and use funds to buy gov bonds and other securities to MAKE LOANS
  17. Trust and Loan Companies
    provide similar service as banks
  18. Credit Union, Caisses Populaires
    • banks owned and controlled by depositors and borrowers
    • regulated by provincial rules
    • large number, small size
  19. Pension Funds
    • receive contributions of firms and workers
    • use funds to buy portfolios and generate income
  20. Insurance Cos
    • provide risk sharing services
    • use funds not paid out as claims to buy bonds and earn interest
  21. Net Worth
    • mkt value of lent minus mkt value of borrowed
    • if positive, solvent
    • if negative, insolvent, will go out of business
  22. Illiquid
    • firm can be solvent but illiquid
    • has made l/t loans w/ borrowed funds, and faced w/ sudden demand to repay more than what they have borrowed
  23. Loanable funds Mkt
    aggregate of all individual fin mkts
  24. Net Taxes
    • taxes paid to gov minus cash transfers received from gov
    • ex ei benefits
  25. Income (equation)
    • Y = c + s + t
    • y - household income
    • c -┬áincome spent on consumption goods
    • s - saved
    • t - paid in net taxes
  26. Investment (equation)
    • I = S + (T-G) + (M-X)
    • s = saved
    • t = money paid in net taxes
    • g = gov expenditure
    • m = imports
    • x = exports
  27. National Saving
    sum of private saving and gov saving (t - g)
  28. Nominal Interest Rate
    number of dollars borrower pays lender in interest a year
  29. real interest rate
    • nominal interest adjusted to remove effects of inflation on buying power of money
    • approx nominal minus inflation rate
  30. Demand for Loanable funds
    • qty demanded = total qty funds needed to finance investment
    • higher interest rate, smaller qty of loans demanded
    • relationship b/w qty loans demanded and real interest rate
  31. Changes in demand for loanable funds
    • expected profit changes
    • more profit from new capital
  32. Supply of Loanable funds
    • qty of loanable funds supplied is total funds available from private saving, gov budget surplus, and international borrowing during a given period
    • other things the same, higher interest rate, greater loanable funds supplied and lower interest rate, smaller qty supplied

    relationship b/w qty laonable funds supplied and real interest rate
  33. Changes in Supply Loanable funds
    • Household disposable income = income - net taxes
    • Higher expected future income, less saving today
    • Higher household wealth, less saving
    • Greater default risk (loan not being repaid) higher interest rate needed
  34. Shifts in Supply Curve
    When one of four elements changes causes shift in supply curve
  35. Changes in Demand and Supply
    • fin mkts volatile in short run, stable in long
    • increase in demand - expected profits increase, increase planned investment, increase demand for loans. This will bring a shortage of loans, driving interest rate up

    Increase in supply - comes w/ changes of savings plans. W/ no change in demand for loans, lenders will give bargains on interest rate
  36. Gov Budget Surplus
    • Increases supply of loanable funds
    • real interest rate falls
    • decrease household saving
    • decrease qty private loans supplied
    • lower rate increases qty demanded of loans
  37. Gov Budget Deficit
    • increases demand for loanable funds
    • real interest rate rises
    • increases household saving
    • increses qty private loans supplied
    • decreases investment and qty loans demanded
  38. Crowding out effect
    tendency for gov budget deficit to raise real interest rate and decrease investment
  39. Ricardpo-Barro Effect
    • suggest gov budget has no effect on real interest rate or investment
    • b/c taxpayers are rational, a deficit today = higher future taxers and lower disposable income, so their savings will increase today
    • private saving increases to match qty demanded by gov
  40. Global Loanable funds mkt
    lenders want high rate, borrowers low
  41. International Capital Mobility
    • mkt is single integrated global mkt
    • funds flow into country where interest is high, surplus lowers interest rate
    • funds flow out of country where interest is low, causes shortage of funds raising interest rate
  42. International Borrowing/Lending
    • LF connected through net exports
    • X<M (- net exports) rest of world supplies
    • X>M, we loan to rest of world
  43. Changes in Demand/Supply Global Mkt
    • same as normal
    • effect depends on size of country

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