Need to Know List: Chapter 13






What is the financial system and what does it do?
o What expectations do savers and borrowers have?
What are financial markets
o What is a bond
 meaning of date of maturity, principal
 characteristics of a bond
 meaning of term
o what does the interest rate depend on & why?
o why are long term bonds riskier than short term bonds? Which pays higher
interest?
 Meaning of credit risk & default
o Does a high credit risk cause low or high interest rates? Why?
o What are junk bonds? What agencies judge credit risks?
 Meaning of tax treatment
o Which bonds do owners have to pay taxes on?
o What exactly are they paying taxes on?
o How does this affect the interest rate?
o Stock market
 Meaning of : stock, equity finance, debt finance
 Difference between stocks and bonds
 Who gets part of the profits of a corporation?
 Which is riskier? Which yields a potential higher reward?
 What does a stock exchange do?
 What determines the price of a stock?
 Purpose of a stock index
 Difference between stock index & stock exchange
What are financial intermediaries?
o Purpose of banks
 Why do small businesses use banks instead of bonds to finance investments?
 how do banks act as a medium of exchange?
 Difference from being a “store of value”
o Mutual funds
 What are they composed of?
 Meaning of portfolio, index fund
 How to invest in mutual fund & risks associated
 Advantages of mutual fund
 Why are economists skeptical of professional money managers’ skills?
National Income Accounts
o Difference between close and open economy
o In a closed economy, how is the formula for GDP different?
 What is national saving? Why is it equal to investment spending?
o Meaning of “T” in the GDP equation
 Difference between private saving & public saving
o Meaning of budget surplus? When does the government run budget surplus?
o Meaning of budget deficit? When does the government run budget deficit?
Difference between saving & investment
Meaning of Market for loanable funds
o What are loanable funds?
o How many interest rates are there in market for loanable funds? Who does this interest rate apply
to? What assumptions does this model make?
o Who does the supply for loanable funds come from?
 What are ways that they supply money?
o Who does the demand for loanable funds come from?
 What are ways that they “demand” loanable funds?
o What is the price of a loan?
 What does it represent?
 How does the price of a loan relate to supply & demand
 As the price of a loan goes up, what happens to the demand for a loan? Supply?
 Why is the real interest rate a better measure of the price of the loan?
Read P. 279 & understand the formula for computing final value/future value



Taxes & Savings
o How do taxes on interest paid from loans affect savings?
o How would a decrease in taxes affect quantity saved? How would this affect the interest rate on
loans and investment?
Taxes & Investment
o How do tax credits on companies/individuals taking out loans affect demand for loans? How
does this affect the interest rate & investment?
Government budget deficits & Surpluses
o Difference between budget deficit & government debt
o Why does a budget deficit decrease the supply of loanable funds? How does this affect the
interest rate & investment?
o Meaning of “crowding out” (how do government deficits decrease the economy’s growth rate?)
o How do budget surpluses increase the economy’s growth rate?