Econ 110 Chapter 13
Econ 110 Chapter 13 Econ 110
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This 4 page Class Notes was uploaded by Joshua Robinson on Thursday April 7, 2016. The Class Notes belongs to Econ 110 at Kansas State University taught by Dr. Al-Hamdi in Spring 2016. Since its upload, it has received 19 views. For similar materials see principles of Macroeconomics in Economcs at Kansas State University.
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Date Created: 04/07/16
Chapter 13: Saving, Investment, and the Financial System Financial Insititutions Financial System o Group of institutions in the economy That help match one person’s saving with another persons investment o Moves the economy’s scarce resources from savers to borrowers Financial Institutions o Financial markets o Financial intermediaries Financial Markets Savers can directly provide funds to borrowers The bond market o Bond: A certificate of indebtedness Date of maturity, when the loan will be repaid Rate of interest, paid periodically until the date of maturity Principal, amount borrowed o Borrowing from the public Used by large corporations, the federal government, or state and local governments o Term: Length of time until maturity A few months, 30 years, perpetuity Longterm bonds are riskier than shortterm bonds. Long term bonds usually pay higher interest rates o Credit risk: probability of default Probability that the borrower will fail to pay some of the interest or principal Higher interest rates for higher probability of default U.S government bonds tend to pay low interest rates Junk bonds, very high interest rates Issued by financially shaky corporations The stock market o Stock: claim to partial ownership in a firm A claim to the profits that a firm makes o Organized stock exchanges Stock prices: demand and supply o Equity finance Sale of stock to raise money o Stock index Average of a group of stock prices Financial intermediaries o Savers can indirectly provide funds to borrowers o Banks Take in deposits from savers Banks pay interest Make loans to borrowers Banks charge interest Facilitate purchasing of goods and services Checks: medium of exchange o Mutual funds Institution that sells shares to the public Uses the proceeds to buy a portfolio of stocks and bonds Advantages Diversification; professional money managers Bonds are called debt finance National Income Accounts Rules of national income accounting o Important identities Identity o An equation that must be true because of the way the variables in the equation are defined o Clarify how different variables are related to one another Accounting Identities GDP o Total income o Total expenditure Y= C+I+G+NX Closed Economy o Doesn’t interact with other economies o NX=0 Open Economy o Interact with other economies o NX = Does not equal 0 o I = YCG Assume closed economy: NX = 0 o Y = C + I + G National Saving, S o Total income in the economy that remains after paying for consumption and government purchases I = Y C G S = Y C G S = I S(p) = Y T C → (S(p): Private savings) I = (Y T C) + (T G) → ( TG = Public Saving) T = taxes minus transfer payments o S = Y C G o S = (Y T C) + (T G) Private saving, Y T C o Income that households have left after paying for taxes and consumption Public saving, T G o Tax revenue that the government has left after paying for its spending Budget surplus: T G > 0 o Excess of tax revenue over government spending Budget deficit: T G < 0 o Shortfall of tax revenue from government spending Accounting identity: S = I Saving = investment Market for loanable funds o Market Those who want to save supply funds Those who want to borrow to invest demand funds o One interest rate Return to saving Cost of borrowing o Assumption o Single financial market The Market for Loanable Funds Supply and demand of loanable funds o Source of the supply of loanable funds Saving o Source of the demand for loanable funds Investment o Price of a loan = real interest rate Borrowers pay for a loan Lenders receive on their saving Supply and demand of loanable funds o As interest rate rises Quantity demanded declines Quantity supplied increases o Demand curve Slope downward o Supply curve Slopes upward Change in interest rate changes the QUANTITY DEMANDED AND QUANTITY SUPPLIED The Market for Loanable Funds The change in the demand and supply change other than things of interest rate Government Policies o Can affect the economy’s saving and investment Saving incentives Investment incentives Government budget deficits and surpluses The Supply is coming from households in loanable funds Shelter some saving from taxation Firms are the demanders Investment tax credit o Affect demand for loanable funds o Increase in demand Deamnd curve shifts right o New equilibrium Higher interest rate Higher quantity of loanable funds Greater saving Policy 3: Budget Deficit/ Surplus Government starts with balanced budget o Then starts running a budget deficit Change in supply of loanable funds Decrease in supply Supply curve shifts left New equilibrium Higher interest rate Smaller quantity of Crowding out o Decrease in investment o Results from government borrowing Government budget deficit o Interest rate rises o Investment falls Bud
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