ECN 211 EXAM 3 – MARBURGER QUESTIONS WITH
VERIFIED ACCURATE ANSWERS
Financial Markets - Answers -People save money that they don't intend to spend
anytime soon
Businesses need money to finance capital investment
The purpose of financial markets is to match up savings with investment
Banks are the primary financial institutions that seek to match up savings with
investment
Capital Investments - Answers -Capital investment allows a country to produce more
goods and services
Bond Market - Answers -To raise the money, it may issue bonds
Principle is what you pay to get the bond; the company uses that principle to fund it's
project
Maturity date is when the bond holder will get the principle back
The interest rate is what the bondholder will earn until the bond matures
Defaulting - Answers -failing to repay a bond, loan, etc. Happens when a company
goes bankrupt, the bondholder will not get his money back
Credit ratings - Answers -Because firms can default, prospective bondholders look up
the firm's credit rating
The higher the risk the higher the interest rate offered
Bond holder - Answers -A bondholder isn't compelled to keep the bond until it matures
If the bondholder needs money now, he can sell the bond on the open market
The new bondholder will receive the full face value at maturity plus the interest listed on
the bond
Stock market - Answers -A company may also finance its project by issuing stock
When you own a share of stock, you are a partial owner of the company
, This entitles you to dividends (the portion of company profits paid to shareholders)
Shareholders are free to sell their shares on the open market
Savers - Answers -Savers represent the supply of loanable funds; They supply the
money that banks loan to borrowers
Banks attract loanable funds by paying interest on deposits
The higher the interest rate, the greater the amount of loanable funds supplied
Borrowers - Answers -Borrowers represent the demand for loanable funds
The interest rate represents the price borrowers pay for a loan
The higher the interest rate, the more expensive the loan
Therefore, the higher the interest rate, the lower the quantity of funds demanded by
borrowers
If savings and investment are important for economic growth, what can be done to
increase savings? - Answers -The amount available to be loaned:
1. Private saving (saving by households and businesses)
2. Public saving (saving by government)
If savings and investment are important for economic growth, what can be done to
increase savings? pt. II - Answers -1. Tax shelters on savings
-People place more money into savings because earnings are not taxed (or not taxed
as much as previously)
2. Investment tax credits
- Businesses receive tax credits for capital investment
- Demand for loanable funds rises
What is the impact of a national budget deficit/surplus on interest rates? - Answers -
Budget deficit: Government spending exceeds tax revenues
-A budget deficit means the govt is spending more than it takes in
-This decreases public saving, which decreases the supply of loanable funds
-Notice that budget deficits increase interest rates
Budget surplus: Tax revenues exceed government spending
-A budget surplus means the govt is spending less than it takes in
-This increases public saving, which increases the supply of loanable funds
Rising Interest Rates and Crowding Out - Answers -If interest rates rise, consumers
and firms will borrow less
VERIFIED ACCURATE ANSWERS
Financial Markets - Answers -People save money that they don't intend to spend
anytime soon
Businesses need money to finance capital investment
The purpose of financial markets is to match up savings with investment
Banks are the primary financial institutions that seek to match up savings with
investment
Capital Investments - Answers -Capital investment allows a country to produce more
goods and services
Bond Market - Answers -To raise the money, it may issue bonds
Principle is what you pay to get the bond; the company uses that principle to fund it's
project
Maturity date is when the bond holder will get the principle back
The interest rate is what the bondholder will earn until the bond matures
Defaulting - Answers -failing to repay a bond, loan, etc. Happens when a company
goes bankrupt, the bondholder will not get his money back
Credit ratings - Answers -Because firms can default, prospective bondholders look up
the firm's credit rating
The higher the risk the higher the interest rate offered
Bond holder - Answers -A bondholder isn't compelled to keep the bond until it matures
If the bondholder needs money now, he can sell the bond on the open market
The new bondholder will receive the full face value at maturity plus the interest listed on
the bond
Stock market - Answers -A company may also finance its project by issuing stock
When you own a share of stock, you are a partial owner of the company
, This entitles you to dividends (the portion of company profits paid to shareholders)
Shareholders are free to sell their shares on the open market
Savers - Answers -Savers represent the supply of loanable funds; They supply the
money that banks loan to borrowers
Banks attract loanable funds by paying interest on deposits
The higher the interest rate, the greater the amount of loanable funds supplied
Borrowers - Answers -Borrowers represent the demand for loanable funds
The interest rate represents the price borrowers pay for a loan
The higher the interest rate, the more expensive the loan
Therefore, the higher the interest rate, the lower the quantity of funds demanded by
borrowers
If savings and investment are important for economic growth, what can be done to
increase savings? - Answers -The amount available to be loaned:
1. Private saving (saving by households and businesses)
2. Public saving (saving by government)
If savings and investment are important for economic growth, what can be done to
increase savings? pt. II - Answers -1. Tax shelters on savings
-People place more money into savings because earnings are not taxed (or not taxed
as much as previously)
2. Investment tax credits
- Businesses receive tax credits for capital investment
- Demand for loanable funds rises
What is the impact of a national budget deficit/surplus on interest rates? - Answers -
Budget deficit: Government spending exceeds tax revenues
-A budget deficit means the govt is spending more than it takes in
-This decreases public saving, which decreases the supply of loanable funds
-Notice that budget deficits increase interest rates
Budget surplus: Tax revenues exceed government spending
-A budget surplus means the govt is spending less than it takes in
-This increases public saving, which increases the supply of loanable funds
Rising Interest Rates and Crowding Out - Answers -If interest rates rise, consumers
and firms will borrow less
