Exam 12: Investment and Financial Markets

Investment spending tends to be closely related to the current pace of economic growth.

Financial intermediaries

In the United States, runs on banks are prevented because

Investment is a smaller component of GDP than consumption, but it is a more stable component.

Recall the Application about how the process of securitization in financial markets led to a rise in the rate of home ownership in the U.S. housing market to answer the following question(s). -Recall the Application. The loans made to borrowers who have a limited ability to actually repay their mortgages are known as

Which of the following equations is correct?

The real interest rate is the rate at which borrowers or lenders ________ to make transactions when issuing or receiving loans.

The maximum amount a person is willing to pay today to receive a payment in the future is known as

Table 12.1 Expected Real Rates of Interest for Five Countries Source: Trading Economics, September, 2010 -Refer to Table 12.1. The inflation rate forecast for Japan is

Recall the Application about energy price uncertainty and its impact on investment spending and GDP growth to answer the following question(s). Increases in oil prices can lead to a drop in GDP. However, uncertainty about oil prices is also an important factor. The volatility of oil prices creates uncertainty for firms making investment decisions, and adversely affects GDP growth. -According to this Application, if the volatility of energy prices led to expectations of declining real GDP, investment spending at that time would tend to decrease. This relationship between the decrease in investment spending and the expected decline in real GDP would be expressed by the

Who suffers primarily when the federal government has to bail out a financial intermediary through the deposit insurance system?

Recall the Application about opting for a lump sum of $500,000 for your retirement or $35,000 per year for the rest of your life to answer the following question(s). -This Application addresses the economic concept of

Table 12.2 Returns on Investment -Referring to Table 12.2, if the nominal interest rate is 8.5 percent and there is no inflation, which investments will be undertaken?

The term investment refers, in general, to

Deposit insurance indirectly helped to create the savings and loan crisis in the United States during the 1980s.

Table 12.2 Returns on Investment -If Table 12.2 represents all the investments available to the economy, the nominal interest rate is 4.5 percent and there is no inflation, what will be the level of investment in the economy?

You should invest in a project if the cost you incur today is greater than the present value of the future payments from the project.

What is a broad definition for an investment?

Table 12.1 Expected Real Rates of Interest for Five Countries Source: Trading Economics, September, 2010 -Refer to Table 12.1. Assuming the inflation rate forecast to be accurate, which nation has the lowest real rate of return?

Runs on banks occur when