ECN 211 Exam 3 - Marburger UPDATED ACTUAL QUESTIONS AND CORRECT
ANSWERS
Financial Markets 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 Capital investment allows a country to produce more goods and services
Bond Market 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 failing to repay a bond, loan, etc. Happens when a company goes bankrupt, the
bondholder will not get his money back
Credit ratings 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 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 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 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 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 The amount available to be loaned:
growth, what can be done to increase savings? 1. Private saving (saving by households and businesses)
2. Public saving (saving by government)
If savings and investment are important for economic 1. Tax shelters on savings
growth, what can be done to increase savings? pt. II -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 Budget deficit: Government spending exceeds tax revenues
interest rates? -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
ANSWERS
Financial Markets 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 Capital investment allows a country to produce more goods and services
Bond Market 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 failing to repay a bond, loan, etc. Happens when a company goes bankrupt, the
bondholder will not get his money back
Credit ratings 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 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 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 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 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 The amount available to be loaned:
growth, what can be done to increase savings? 1. Private saving (saving by households and businesses)
2. Public saving (saving by government)
If savings and investment are important for economic 1. Tax shelters on savings
growth, what can be done to increase savings? pt. II -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 Budget deficit: Government spending exceeds tax revenues
interest rates? -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
