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4. Institutions, Markets, and Intermediaries Role in Matching Savings and Investment Spending Role in Providing a Market for Loanable Funds Introducing the Financial System The Financial System > Introducing the Financial System Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/economics?campaign_content=book_5770_section_105&campaign_term=Economics&utm_campaign=powerpoint&utm_me dium=direct&utm_source=boundless

5. Financial intermediaries provide access to capital. Banks convert short-term liabilities (demand deposits) into long-term assets by providing loans; thereby transforming maturities. Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles. Institutions, Markets, and Intermediaries Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/economics/textbooks/alternative-to-economics-3rd-paul-krugman-robin-wells-1464128731-9781464128738/the-financial- system-25/introducing-the-financial-system-105/institutions-markets-and-intermediaries-406- 12574?campaign_content=book_5770_section_105&campaign_term=Economics&utm_campaign=powerpoint&utm_medium=direct&utm_source= boundless Banks are the most common financial intermediaries View on Boundless.com The Financial System > Introducing the Financial System

6. The marginal propensity to save (MPS), the percentage of after-tax income that an economic agent will choose to save. Savings marketed by financial intermediaries, all consist of stocks, bonds, and cash balances, which in turn pay for the investment capital that increases productivity, efficiency and output of goods and services. Financial intermediaries are a significant component to the transformation of savings into investment. Role in Matching Savings and Investment Spending Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/economics/textbooks/alternative-to-economics-3rd-paul-krugman-robin-wells-1464128731-9781464128738/the-financial- system-25/introducing-the-financial-system-105/role-in-matching-savings-and-investment-spending-407- 12575?campaign_content=book_5770_section_105&campaign_term=Economics&utm_campaign=powerpoint&utm_medium=direct&utm_source= boundless Bonds are a type of savings View on Boundless.com The Financial System > Introducing the Financial System

7. In the loanable funds market, market clearing is defined as the interest rate/loanable funds quantity where savings equal investment (the amount of capital needed for property, plant, and equipment based investments). The interest rate is the cost of borrowing or demanding loanable funds and is the amount of money paid for the use of a dollar for a year. Loanable funds are often used to invest in new capital goods. Therefore, the demand and supply of capital is usually discussed in terms of the demand and supply of loanable funds. Role in Providing a Market for Loanable Funds Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/economics/textbooks/alternative-to-economics-3rd-paul-krugman-robin-wells-1464128731-9781464128738/the-financial- system-25/introducing-the-financial-system-105/role-in-providing-a-market-for-loanable-funds-408- 12576?campaign_content=book_5770_section_105&campaign_term=Economics&utm_campaign=powerpoint&utm_medium=direct&utm_source= boundless Equilibrium in the loanable funds market View on Boundless.com The Financial System > Introducing the Financial System

8. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

9. Key terms financial intermediary A financial institution that connects surplus and deficit agents. loanable funds Money available to be issued as debt. pooling grouping together of various resources or assets real interest rates The rate of interest an investor expects to receive after allowing for inflation. Free to share, print, make copies and changes. Get yours at www.boundless.com The Financial System

10. Bonds are a type of savings Savings are used to fund investments, where investments are defined as expenditures on factory plants, equipment and homes. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. CC BY-SA http://upload.wikimedia.org/wikipedia/commons/thumb/5/58/EE_Savings_Bond.jpg/250px-EE_Savings_Bond.jpg View on Boundless.comCC BY-SAhttp://upload.wikimedia.org/wikipedia/commons/thumb/5/58/EE_Savings_Bond.jpg/250px-EE_Savings_Bond.jpgView on Boundless.com The Financial System

11. Banks are the most common financial intermediaries Banks convert deposits to loans and thereby increase access to capital by serving as a financial intermediary between savers and borrowers. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. CC BY-SA http://upload.wikimedia.org/wikipedia/commons/thumb/9/9a/National_Bank_of_Washington_301_7th_Street%252C_NW_in_Washington%252C_D.C.JPG/220px- National_Bank_of_Washington_301_7th_Street%252C_NW_in_Washington%252C_D.C.JPG View on Boundless.comCC BY-SA http://upload.wikimedia.org/wikipedia/commons/thumb/9/9a/National_Bank_of_Washington_301_7th_Street%252C_NW_in_Washington%252C_D.C.JPG/220px- National_Bank_of_Washington_301_7th_Street%252C_NW_in_Washington%252C_D.C.JPGView on Boundless.com The Financial System

12. Equilibrium in the loanable funds market When the supply and demand for loanable funds are equal, savings is equal to investment and the loanable funds market is in equilibrium at the prevailing interest rate. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. CC BY-SA http://upload.wikimedia.org/wikipedia/en/5/5d/Loanable_funds_market.JPG View on Boundless.comCC BY-SAhttp://upload.wikimedia.org/wikipedia/en/5/5d/Loanable_funds_market.JPGView on Boundless.com The Financial System

13. Free to share, print, make copies and changes. Get yours at www.boundless.com The Financial System What is the major function of financial intermediaries? A) All of these answers B) Converting short-term liabilities to long-term assets C) Converting risky investments into relatively risk-free investments D) Reduce the transaction and search costs for lenders and borrowers.

14. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ The Financial System What is the major function of financial intermediaries? A) All of these answers B) Converting short-term liabilities to long-term assets C) Converting risky investments into relatively risk-free investments D) Reduce the transaction and search costs for lenders and borrowers.

15. Free to share, print, make copies and changes. Get yours at www.boundless.com The Financial System Which of the following is a financial intermediary? A) pension funds B) insurance companies C) All of them. D) banks

16. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ The Financial System Which of the following is a financial intermediary? A) pension funds B) insurance companies C) All of them. D) banks

17. Free to share, print, make copies and changes. Get yours at www.boundless.com The Financial System How does savings become investment? A) Through the MPC. B) Through disposable income. C) Through the repackaging and sale of depository assets. D) Through higher real interest rates.

18. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ The Financial System How does savings become investment? A) Through the MPC. B) Through disposable income. C) Through the repackaging and sale of depository assets. D) Through higher real interest rates.

19. Free to share, print, make copies and changes. Get yours at www.boundless.com The Financial System If the market for loanable funds is at equilibrium and the interest rate rises, what will happen? A) There will be a shortage of loanable funds B) The supply curve for loanable funds will shift to the right C) There will be a surplus of loanable funds D) The demand curve for loanable funds will shift to the left

20. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ The Financial System If the market for loanable funds is at equilibrium and the interest rate rises, what will happen? A) There will be a shortage of loanable funds B) The supply curve for loanable funds will shift to the right C) There will be a surplus of loanable funds D) The demand curve for loanable funds will shift to the left

21. Free to share, print, make copies and changes. Get yours at www.boundless.com The Financial System If the interest rate is 5% and a firm issues a five year bond for $1,000, approximately how much will the firm repay at the end of the five years? A) $1250 B) $1282 C) $1050 D) $1216

22. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ The Financial System If the interest rate is 5% and a firm issues a five year bond for $1,000, approximately how much will the firm repay at the end of the five years? A) $1250 B) $1282 C) $1050 D) $1216

23. Attribution Wikipedia. "Financial intermediary." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Financial_intermediaryCC BY-SA 3.0http://en.wikipedia.org/wiki/Financial_intermediary Wikipedia. "financial intermediary." CC BY-SA 3.0 http://en.wikipedia.org/wiki/financial%20intermediaryCC BY-SA 3.0http://en.wikipedia.org/wiki/financial%20intermediary Wiktionary. "pooling." CC BY-SA 3.0 http://en.wiktionary.org/wiki/poolingCC BY-SA 3.0http://en.wiktionary.org/wiki/pooling Wikibooks. "Macroeconomics/Savings and Investment." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Macroeconomics/Savings_and_InvestmentCC BY-SA 3.0 http://en.wikibooks.org/wiki/Macroeconomics/Savings_and_Investment Wikipedia. "real interest rates." CC BY-SA 3.0 http://en.wikipedia.org/wiki/real%20interest%20ratesCC BY-SA 3.0http://en.wikipedia.org/wiki/real%20interest%20rates Wikipedia. "Loanable funds." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Loanable_fundsCC BY-SA 3.0http://en.wikipedia.org/wiki/Loanable_funds Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//economics/definition/loanable-fundsCC BY-SA 3.0http://www.boundless.com//economics/definition/loanable-funds Free to share, print, make copies and changes. Get yours at www.boundless.com The Financial System