ECN 211 EXAM 3 – MARBURGER QUESTIONS AND CORRECT ANSWERS

ECN 211 EXAM 3 – MARBURGER
QUESTIONS AND CORRECT
ANSWERS
FinancialA2MarketsA2-A2Ans--
PeopleA2saveA2moneyA2thatA2theyA2don'tA2intendA2toA2spendA2anytimeA2soon

BusinessesA2needA2moneyA2toA2financeA2capitalA2investment

TheA2purposeA2ofA2financialA2marketsA2isA2toA2matchA2upA2savingsA2withA2investment

BanksA2areA2theA2primaryA2financialA2institutionsA2thatA2seekA2toA2matchA2upA2savingsA2wit
hA2investment

CapitalA2InvestmentsA2-A2Ans--
CapitalA2investmentA2allowsA2aA2countryA2toA2produceA2moreA2goodsA2andA2services

BondA2MarketA2-A2Ans--ToA2raiseA2theA2money,A2itA2mayA2issueA2bonds

PrincipleA2isA2whatA2youA2payA2toA2getA2theA2bond;A2theA2companyA2usesA2thatA2principleA2
toA2fundA2it'sA2projectA2

MaturityA2dateA2isA2whenA2theA2bondA2holderA2willA2getA2theA2principleA2back

TheA2interestA2rateA2isA2whatA2theA2bondholderA2willA2earnA2untilA2theA2bondA2matures

DefaultingA2-A2Ans--
failingA2toA2repayA2aA2bond,A2loan,A2etc.A2HappensA2whenA2aA2companyA2goesA2bankrupt,
A2theA2bondholderA2willA2notA2getA2hisA2moneyA2back


CreditA2ratingsA2-A2Ans--
BecauseA2firmsA2canA2default,A2prospectiveA2bondholdersA2lookA2upA2theA2firm'sA2creditA2r
ating

TheA2higherA2theA2riskA2theA2higherA2theA2interestA2rateA2offered

BondA2holderA2-A2Ans--
AA2bondholderA2isn'tA2compelledA2toA2keepA2theA2bondA2untilA2itA2matures

IfA2theA2bondholderA2needsA2moneyA2now,A2heA2canA2sellA2theA2bondA2onA2theA2openA2ma
rket

,TheA2newA2bondholderA2willA2receiveA2theA2fullA2faceA2valueA2atA2maturityA2plusA2theA2inter
estA2listedA2onA2theA2bond

StockA2marketA2-A2Ans--
AA2companyA2mayA2alsoA2financeA2itsA2projectA2byA2issuingA2stock

WhenA2youA2ownA2aA2shareA2ofA2stock,A2youA2areA2aA2partialA2ownerA2ofA2theA2company

ThisA2entitlesA2youA2toA2dividendsA2(theA2portionA2ofA2companyA2profitsA2paidA2toA2shareh
olders)

ShareholdersA2areA2freeA2toA2sellA2theirA2sharesA2onA2theA2openA2market

SaversA2-A2Ans--
SaversA2representA2theA2supplyA2ofA2loanableA2funds;A2TheyA2supplyA2theA2moneyA2thatA2
banksA2loanA2toA2borrowers

BanksA2attractA2loanableA2fundsA2byA2payingA2interestA2onA2deposits

TheA2higherA2theA2interestA2rate,A2theA2greaterA2theA2amountA2ofA2loanableA2fundsA2suppli
ed

BorrowersA2-A2Ans--BorrowersA2representA2theA2demandA2forA2loanableA2funds

TheA2interestA2rateA2representsA2theA2priceA2borrowersA2payA2forA2aA2loan

TheA2higherA2theA2interestA2rate,A2theA2moreA2expensiveA2theA2loan

Therefore,A2theA2higherA2theA2interestA2rate,A2theA2lowerA2theA2quantityA2ofA2fundsA2dema
ndedA2byA2borrowers

IfA2savingsA2andA2investmentA2areA2importantA2forA2economicA2growth,A2whatA2canA2beA2d
oneA2toA2increaseA2savings?A2-A2Ans--TheA2amountA2availableA2toA2beA2loaned:
1.A2PrivateA2savingA2(savingA2byA2householdsA2andA2businesses)A2
2.A2PublicA2savingA2(savingA2byA2government)

IfA2savingsA2andA2investmentA2areA2importantA2forA2economicA2growth,A2whatA2canA2beA2d
oneA2toA2increaseA2savings?A2pt.A2IIA2-A2Ans--1.A2TaxA2sheltersA2onA2savings
-
PeopleA2placeA2moreA2moneyA2intoA2savingsA2becauseA2earningsA2areA2notA2taxedA2(orA2
notA2taxedA2asA2muchA2asA2previously)

2.A2InvestmentA2taxA2credits
-A2BusinessesA2receiveA2taxA2creditsA2forA2capitalA2investment
-A2DemandA2forA2loanableA2fundsA2rises

, WhatA2isA2theA2impactA2ofA2aA2nationalA2budgetA2deficit/surplusA2onA2interestA2rates?A2-
A2Ans--BudgetA2deficit:A2GovernmentA2spendingA2exceedsA2taxA2revenues
-AA2budgetA2deficitA2meansA2theA2govtA2isA2spendingA2moreA2thanA2itA2takesA2inA2
-ThisA2decreasesA2publicA2saving,A2whichA2decreasesA2theA2supplyA2ofA2loanableA2funds
-NoticeA2thatA2budgetA2deficitsA2increaseA2interestA2rates

BudgetA2surplus:A2TaxA2revenuesA2exceedA2governmentA2spending
-AA2budgetA2surplusA2meansA2theA2govtA2isA2spendingA2lessA2thanA2itA2takesA2inA2
-ThisA2increasesA2publicA2saving,A2whichA2increasesA2theA2supplyA2ofA2loanableA2funds

RisingA2InterestA2RatesA2andA2CrowdingA2OutA2-A2Ans--
IfA2interestA2ratesA2rise,A2consumersA2andA2firmsA2willA2borrowA2less

InA2essence,A2increasesA2inA2governmentA2borrowingA2resultsA2inA2lessA2borrowingA2byA2t
heA2privateA2sector

ThisA2isA2calledA2crowdingA2out

CrowdingA2OutA2-A2Ans--GovernmentA2borrowingA2increases

WhichA2causesA2interestA2ratesA2toA2increase

WhichA2causesA2privateA2investmentA2toA2fall

WhichA2slowsA2economicA2growth

WhichA2isA2calledA2crowdingA2outA2

MainA2point:A2asA2governmentA2borrowingA2increases,A2privateA2investmentA2decreases

NationalA2DebtA2-A2Ans--
EachA2yearA2thatA2theA2governmentA2runsA2aA2deficit,A2itA2mustA2borrowA2moneyA2toA2payA
2itsA2bills


TheA2sumA2totalA2ofA2allA2moneyA2borrowedA2byA2theA2governmentA2thatA2hasA2yetA2toA2be
A2repaidA2isA2calledA2theA2nationalA2debt


DifferenceA2betweenA2aA2budgetA2deficitA2andA2theA2nationalA2debt?A2-A2Ans--
AA2budgetA2deficitA2isA2theA2differenceA2betweenA2governmentA2spendingA2andA2taxA2reve
nuesA2betweenA2twoA2pointsA2inA2timeA2(i.e.A2oneA2year)

TheA2nationalA2debtA2isA2theA2sumA2ofA2borrowedA2moneyA2yetA2toA2beA2repaidA2(i.e.A2sum
A2ofA2allA2previousA2deficits)


LafferA2CurveA2-A2Ans--WhatA2impactA2doA2taxA2cutsA2haveA2onA2taxA2revenue?