Financial Intermediaries 1. Recall “ Match the terms with the appropriate definition ______Financial System______Bond______Crowd out______Mutual Fund______Stock______Financial Markets______Financial Intermediaries ______Closed Economy______Bank______Market for Loanable Funds______Private Savings ______Public Savings a. The market in which those who want to save supply funds and those who want to borrow to invest funds b. Certificate of indebtedness c. Financial institutions through which savers can directly lend to borrowers d. Financial institutions through which savers can indirectly lend to borrowers e. An Economy with no international trade f. Institution that collects deposits and makes loans g. A decrease in investment as a result of government borrowing h. Certificate of ownership of a small portion of a large firm i. The group of institutions in the economy that help match borrowers and lenders j. Institution that sells shares and uses the proceeds to buy a diversified portfolio k. The tax revenue that the government has left after paying for its spending l. The income that remains after consumption expenditure and taxes Problems and Applications 2. According to the definition by macroeconomics: Which of the following situations represent Investment? Saving? Explain. a. Your family takes out a mortgage and buys and new house b. You use your $200 paycheck to buy stock in Apple c. Your roommate earns $100 and deposits it in her interest earning account at a bank d. You borrow $1,000 from a bank to buy a car to use in your pizza delivery business. 3. Assume that a closed economy have collected the following information for a particular year. Y = $10,000 C = $ 6,000 T= $ 1,500 G= $ 1,700 The economists estimate that the investment function is: I = 3,300-100r a. Calculate private savings b. Calculate public savings c. National savings d. Investment, and the equilibrium real interest rate 4. Suppose the government borrows $20 billion more next year than this year. Use a supply and demand diagram (Market for loanable funds) to analyze this policy. Does the interest rate rise or fall? What happens to investment? Private Savings? Public Savings? National Savings? Thinking Like an Economist 5. Which of the following bonds would you expect to pay a higher interest rate? Explain a. A bond of U.S. Government or a bond of an Eastern European government b. A bond that repays principle in year 2015 or a bond that repays principle in year 2040 c. A bond from Coca-Cola or a bond from a software company that you run in your garage