ECON 203, Chapter 8 TAMU questions with correct answers

Define Saving CORRECT ANSWER Saving is when someone spends less than they earn and use the rest to buy stocks, bonds, or to put in a bank account. Define Investment CORRECT ANSWER Investment refers to the purchase of new capital such as equipment or buildings. What is the Financial System? CORRECT ANSWER The financial system is what links the savers(lenders) and the investors(borrowers). The savers and or lenders are the people who have an excess amount of funds with no use for the funds, and the investors and or borrowers are the people with a use for funds that they do not have. Structure of the Financial System CORRECT ANSWER Breaks down to two groups: Financial Markets and Financial Intermediaries What are financial markets? CORRECT ANSWER This is where someone who wants to save(lend) can directly lend to someone who would like to borrow. Bond Market- Needing money, Selling a bond that promises to pay back plus some. (e.g. 10 million and promise to pay back 1 million for 12 years) Debt finance Stock Market- offering part ownership in a company. Equity Finance What are financial intermediaries? CORRECT ANSWER This is a way for savers or lenders to indirectly supply to investors or borrowers through things such as banks, mutual funds, and insurance companies. They all pull money from savers(lenders) and hands them out to investors(borrowers) Saving and Investment in the National Income