Page 272 - Krugmans Economics for AP Text Book_Neat

3. The federal government is said to be “dissaving” when c. savings and loan.
a. there is a budget deficit. d. pension fund.
b. there is a budget surplus. e. life insurance company.
c. there is no budget surplus or deficit.
5. A financial intermediary that provides liquid financial assets in
d. savings does not equal investment spending.
the form of deposits to lenders and uses their funds to finance
e. national savings equals private savings.
the illiquid investment spending needs of borrowers is called a
4. A nonprofit institution collects the savings of its members and a. mutual fund.
invests those funds in a wide variety of assets in order to provide b. bank.
its members with income after retirement. This describes a c. corporation.
a. mutual fund. d. pension fund.
b. bank. e. life insurance company.

Tackle the Test: Free-Response Questions

1. Identify and describe the three tasks of a well-functioning 2. List and describe the four most important types of financial
financial system. intermediaries.

Answer (6 points)
1 point: Decrease transaction costs
1 point: A well -functioning financial system facilitates investment spending by
allowing companies to borrow large sums of money without incurring large
transaction costs.
1 point: Decrease risk
1 point: A well -functioning financial system helps people reduce their exposure
to risk, so that they are more willing to engage in investment spending in the
face of uncertainty in the economy.
1 point: Provide liquidity
1 point: A well-functioning financial system allows the fast, low-cost
conversion of assets into cash.

230 section 5 The Financial Sector