Chapter 13 - Saving, Investment, and the Financial System
Chapter 13 - Saving, Investment, and the Financial System Econ 110
Popular in principles of Macroeconomics
Popular in Economcs
This 5 page Class Notes was uploaded by Erin Payne on Thursday April 21, 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 72 views. For similar materials see principles of Macroeconomics in Economcs at Kansas State University.
Reviews for Chapter 13 - Saving, Investment, and the Financial System
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 04/21/16
Week 10 March 28th April 6th Spring 2016 Chapter 13 Notes Saving, Investment, and the Financial System ● Sowers (Lenders): Earnings > Spending ● Borrowers: Earnings < Spending ● Financial System ○ Group of institutions in the economy. ■ Help match one person’s savings with another person’s investment. ■ Moves the economy’s scarce resources from savers to borrowers. ● Financial Institutions ○ Financial market (buyers and sellers). ○ Financial intermediaries (“middlemen”). ● Financial markets are almost direct financing, no middleman transfer of money. ● Financial intermediaries include middlemen between the buyer and seller. ● Financial Markets ○ Savers can directly provide funds to borrowers. 1.) The bond market (∴ “An IOU or promise”). 2.) The stock market. ● The Bond Market ○ Bond 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. ○ Borrowing from the public. ■ Used by large corporations, the federal government, or state and local governments. ○ Term the length of time until maturity. ■ A few months, 30 years, perpetuity. ■ Longterm bonds are riskier than shortterm bonds. ● Usually pay higher interest rates. ○ Credit risk the 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. Notes Key:Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided b instructor. Week 10 March 28th April 6th Spring 2016 ○ Tax treatment ■ Interest on most bonds is taxable income. ■ Municipal bonds ● Issued by state and local government. ● Owners are not required to pay federal income tax on the interest income. ● Lower interest income. ○ Stock claim to partial ownership in a firm. ■ A claim to the profits that a firm makes. ■ Someone cannot own stocks in government! ○ Organized stock exchanges ■ Stock price demand and supply. ○ Equity finance ■ Sale of stock to raise money. ○ Stock index ■ Average of a group of stock prices. ● Financial Intermediaries ○ Savers can indirectly provide funds to borrowers. ■ 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. ■ 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. ● Rules of National Income Accounting ○ Important identities. ● Identity ○ An equation that must be true because of the way the variables in the equation are defined. ○ Clarify how different variables are related to one another. Income* (⇢ pay tax) → Consume → Save → Borrowers (⇢ firms and households) → Invest *Remember: National income = GDP = Y = C + I + G + NX Notes Key Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided y instructor. Week 10 March 28th April 6th Spring 2016 ● Closed economy: ○ Do not interact with other economies. ○ NX = 0. ● Open economy: ○ Interact with other economies. ○ NX ≠ 0. ● In a closed economy I = Y C G ○ ∴Investment = Savings ⇒ I = S ● S = Sprivate + Spublic where Sprivate = Y T C and Spublic = T G. ○ ∴ S = (Y T C) + (T G) ● Private Savings ○ Income that households have left after paying for taxes and consumption. ● Public Savings ○ Tax revenue that the government has left after paying for its spendings. 1.) If T > G⇒ Spublic > 0⇒ Budget surplus ○ Excess of tax revenue over government spending. 2.) If T < G⇒ Spublic < 0⇒ Budget deficit ○ Deficit of tax revenue, but government in debt. 3.) If T = G⇒ Spublic = 0⇒ Budget balance ○ Tax revenue and government spending in balance. ● Saving = Investment ○ For the economy as a whole. ■ One person’s savings can finance another person’s investment. ● Market for Loanable Funds ○ Market ■ Those who want to save supply funds. ■ Those who want to borrow to invest demand funds. ○ One interest rate ■ Return to saving. ■ Cost of borrowing. ○ Assumption ■ Single financial market. ○ Supply and demand of loanable funds ■ Source of the supply of loanable funds. ● Saving. ○ Source of the demand for loanable funds. ■ Investment. ○ Price of the loan = real interest rate. ■ Borrowers pay for a loan. Notes Ke Boldedtexts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice pro ided by instructor. Week 10 March 28th April 6th Spring 2016 ■ Lenders receive on their saving. ● If interest changes, it is a change in price which means it leads to a change in quantity of supply and/or demanded. ● Supply and demand of loanable funds. ○ As interest rate rises ■ Quantity demanded declines. ■ Quantity supplied increases. ○ Demand curve ■ Slope downward. ○ Supply curve ■ Slope upward. ● If interest rate changes (changes in price), quantity demanded and quantity supplied changes. NOT the supply and demand themselves (or the curves themselves). ● Government Policies ○ Can affect the economy’s saving and investment. ■ Saving incentives. ■ Investment incentives. ■ Government budget deficits and surpluses. ● Shelter some savings from taxes ○ Affect supply of loanable funds. ○ Increase in supply. ■ Supply curve shifts right. ○ New equilibrium. ■ Lower interest rate. ■ Higher quantity of loanable funds. ● Greater investment. ● Investment Tax Credit ○ Affect demand for loanable funds. ○ Increase in demand. ■ Demand curve shifts right. ○ New equilibrium. ■ Higher interest rate. ■ Higher quantity of loanable funds. ● Greater saving. ● S = private saving + public saving. ● S = (Y T C) + (T G) ⇒ If budget deficit = T < G ○ ∴Public saving ≤ 0 then S↓ ● Government starts with a balanced budget Notes Key Boldedtexts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided by instructor. Week 10 March 28th April 6th Spring 2016 ○ 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 loanable funds. ● Crowding Out ○ Decrease in investment. ○ Results from government borrowing. ● Government budget deficit ○ Interest rate rises. ○ Investment falls. ● Government budget surplus ○ Increase supply of loanable funds. ○ Reduce interest rate. ○ Stimulates investment. Notes Key:Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided by instructor.
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'