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ECON 203 Exam 3 || with 100% Verified Solutions.
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What is a financial market? correct answers a market in which people trade future claims on funds or goods (ex: a loan, stocks, insurance) Examples of "future claims": correct answers 1.) Loan: the bank gives you money now in return for repayment in the future 2.) Stocks: buying a company stock...

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  • August 16, 2024
  • 19
  • 2024/2025
  • Exam (elaborations)
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  • what is a financial market

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  • ECON 203
  • ECON 203

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ECON 203 Exam 3 || with 100% Verified Solutions.
What is a financial market? correct answers a market in which people trade future claims on
funds or goods (ex: a loan, stocks, insurance)

Examples of "future claims": correct answers 1.) Loan: the bank gives you money now in return
for repayment in the future
2.) Stocks: buying a company stock today gives you a right to a share of profits in the future
3.) Insurance: you pay premiums now in return for the right to submit a claim for compensation
in the future

What is a "buyer" in a financial market? correct answers A borrower who wants to spend funds
on something valuable now.

They represent demand.

What is a "seller" in a financial market? correct answers A saver who lets others borrow funds
for a price.

They represent supply.

Examples of buyers (borrowers): correct answers -families buying the houses
-students taking loans to go to college
-corporations building new factories
-entrepreneurs starting new ventures
-government

Examples of sellers (savers): correct answers People who:
-put money into savings accounts or mutual funds
-buy stocks
-give loans
-etc.

What are the 3 bank functions? correct answers 1.) Serve as an intermediary.
2.) Provide liquidity.
3.) Diversify risk.

The bank serves as an intermediary between savers and borrowers. What does this mean? correct
answers The bank connects the borrow to a wide range of people who have spare funds.

The bank provides liquidity. What does this mean? correct answers The bank makes cash more
readily accessible when and where you want it. There is no need to keep cash literally on hand.
ATMs, checkbooks, and credit cards allow instant access to cash when it is needed.

,The bank diversifies risk. What does this mean? correct answers The bank pools many borrowers
and lenders together, so the individual saver does not bear the full burden of a failed investment.
A few borrowers will default their loans, but most will repay.

market for loanable funds correct answers a market in which savers supply funds to those who
want to borrow

"__________ ______" are the dollars that are available between lenders and borrowers. correct
answers loanable funds

__________ is the portion of income that is not immediately spent on consumption of goods and
services. correct answers Savings

____________ is spent on productive inputs. correct answers Investment

Productive inputs include: correct answers factories, machinery, and inventories

The ___________ ______ (r) is the price of borrowing money for a specific period of time.
(expressed as a percentage per dollar borrowed per unit of time) correct answers interest rate

Determinants of savings: correct answers 1.) Culture (Chinese people tend to save more than
Americans because of different cultures and traditions).
2.) Social welfare policies (uncertainty about future increases savings).
3.) Wealth (ambiguous affect, but definitely matters).
4.) Current economic conditions (during recession savings decrease, during economic boom
savings increases)
5.) Expectations about future economic conditions (low expectations lead to higher savings).

crowding out correct answers the reduction in private borrowing caused by an increase in
government borrowing

Private savings (S) correct answers refers to the savings of individuals or corporations within a
country

Income (GDP) = Consumption + Private Savings

What happens to the investment curve when the economy is in a boom? correct answers A
booming economy can make investors more eager to borrow money, because they expect their
investments will earn higher profits. This shifts the investment curve to the right.

What happens to the investment curve when the economy is in a bust? correct answers An
economy in a bust can decrease incentives to take out a loan, because less investment would be
repaid. This shifts the investment curve to the left.

As the government increases its borrowing, investments increase, which makes interest rates
________. This makes the cost of borrowing high for other investors. correct answers increase

, Public savings correct answers the difference between government tax revenue (T) and
government spending (G)

Public savings = Tax revenue - Government spending = T - G

Formula for Public Savings correct answers T - G

Formula for Private Savings correct answers Y - C - T

Formula for National Savings correct answers NS= Y - C - G

National savings correct answers national savings is equal to private and public savings

NS= S public + S private

Investment (I) = NS [only in a closed economy]

closed economy correct answers an economy that does not interact with other countries'
economies (NX = 0)

(the identity between national savings and investment holds only in a closed economy)

open economy correct answers when an economy interacts with other countries' economies

capital outflow correct answers when money saved domestically is invested in another country

capital inflow correct answers when savings from another country finance domestic investment

For the global economy as a whole, savings always equals __________. correct answers
investment

When net capital flow is greater than zero, then investment is _______ than national savings.
correct answers greater

When net capital flow is less than zero, then investment is ________ than national savings.
correct answers less

When net capital flow is equal to zero, then investment is ________ to national savings. correct
answers equal

There are two basic factors driving differences in interest rates: correct answers 1.) The loan term
2.) The risk

The longer the loan term is, the ________ the interest rate. correct answers higher

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