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ECON111 Macroeconomics Chapter 13 Notes

by: Lauren Heller

ECON111 Macroeconomics Chapter 13 Notes Econ 111

Marketplace > University of Alabama - Tuscaloosa > Econ 111 > ECON111 Macroeconomics Chapter 13 Notes
Lauren Heller
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About this Document

Theres notes were taken from the professors lecture.
Kent 0. Zirlott
Class Notes
Econ, Economics, Macro, Macroeconomics, EC111, Chapter 13
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This 3 page Class Notes was uploaded by Lauren Heller on Tuesday February 23, 2016. The Class Notes belongs to Econ 111 at University of Alabama - Tuscaloosa taught by Kent 0. Zirlott in Fall 2016. Since its upload, it has received 29 views.


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Date Created: 02/23/16
Macro- Chapter 13  Financial Institutions  Financial system- the group of institutions that helps match the saving of one person with the investment of another  Financial market- institution though which savers can directly provide funds to borrowers  The bond market  Bond- a certified indebtedness  The stock market  Stock- a claim to partial ownership in a firm  Financial intermediaries- institutions through which savers can indirectly provide funds to borrows  Banks  mutual funds- institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds  Different Kinds of Savings  Private savings- the portion of households’ income that is not used for consumption or paying taxes  = Y – T – C  Public savings- tax revenue less government spending  = T – G  National savings- the portion of national income that is not used for consumption or government purchases  = private saving + public saving  = Y – T – C + T – G  = Y – C – G  Saving and Investments  Nation income accounting:  Y = C + I + G + NX  Closed Economy  Y = C + I + G  I = Y – C – G  Saving = investment in closed economy  Budget Surplus- an excess of tax revenue over government spending  = T – G  = public saving  Budget deficit- a shortfall of tax revenue from government spending  = G – T  - (public savings) ------ negative public savings  The meaning of Saving and Investment  Private saving- the income remaining after households pay their taxes and pay for consumption  Examples of what households do with savings:  Buy corporate bonds or equities  Purchase a certificate of deposit at the band  Buy shares of a mutual fund  Let accumulate in saving or checking accounts  Investment- the purchase of new capital  The market for loanable funds  A supply-demand model of the financial system  Assume: only one financial market  All savers deposit their savings in this market  All borrowers take out loans from this market  There is one interest rate, which is both the return to saving and the cost of borrowing  The supply for loanable funds comes from savings  Households with extra income can loan it out and earn interest  Public saving, if positive, adds to national saving and the supply of loanable funds  Public saving, if negative reduces national saving and the supply of loanable funds  The Slope of the supply curve represents:  An increase in the interest rate makes saving more attractive, which increase the quantity of loanable funds supplies  The demand for loadable funds comes from investments  The slope of the demand curve  A fall in interest rate reduces the cost of borrowing, which increases the quantity of loanable funds demanded  Equilibrium  The interest rate adjusts to equate supple and demand  The interest rate is the real interest rate  For policies below interest rates on the Y axis (side), and Loanable Funds on the X axis (bottom):  Policy 1: Saving Incentives  Tax incentives for savings increase the supply of loadable funds  Shifts supply during to the right  This reduces the equilibrium interest rate and increases the quantity of loanable funds  Policy 2: Investment Incentives  An investment tax credit increases the demand curve increases the demand for loanable funds  Shifts the demand curve to the right  Raises the equilibrium interest rate and increases the equilibrium quantity of loanable funds  Factors that effect Savings (supply):  Changes in Income  Expectations  Factors that effect Investment (demand):  Technological progress  Expectation  The crowding out effect- increase in budget deficit causes a fall in investment, the government borrows to finance its deficit, leaving less funds available for investment  Recall: investment is important in the long-run economic growth  Budget deficit reduces the economy’s growth rate and future standard of living  The U.S Government Debt  The government finances deficit by borrowing (selling government bonds)  Persistent deficits lead to a rising government debt  The ratio of government debt to GDP is useful measure of the governments indebtedness relative to its ability to raise tax revenue  Historically, the debt- GDP ratio usually rises during wartime and falls during peace time


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