Chapter 13 Notes
Chapter 13 Notes EC 111
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This 4 page Class Notes was uploaded by Carter Cox on Wednesday March 2, 2016. The Class Notes belongs to EC 111 at University of Alabama - Tuscaloosa taught by Zirlott in Spring 2015. Since its upload, it has received 46 views. For similar materials see Principles of Macroeconomics in Economcs at University of Alabama - Tuscaloosa.
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Date Created: 03/02/16
Chapter 13 Notes Macroeconomics Financial Institutions - Financial System o The group of institutions that helps match the saving of one person with the investment of another - Financial Markets o Institutions through which savers can directly provide funds to borrowers o The Bond Market A bond is a certificate of indebtness o The Stock Market Stock is a claim to partial ownership in a firm - Financial Intermediates o Institutions through which saver can indirectly provide funds to borrower o Examples: Banks Mutual funds (mortgage) Institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds Different Kinds of Saving - Private Saving (household) o The portion of households income that is not used for consumption or paying taxes o Y- T- C Y is income T is tax C is consumption - Public Saving o Tax revenue less than government spending o T- G T is tax revenue G is government spending National Saving - Private saving + public saving - End product (Y- C- G) o Y is income o C is consumption o G is government spending - The portion of national income that is not used for consumption or government purchases Saving and Investment - Y= C + I + G - Solve for I o I= Y – C – G - Saving is equal to investment in a closed economy o Closed economy do not trade with outside world Budget Deficit and Surpluses - Budget Surplus o An excess of tax revenue over government spending o T – G o Public saving = positive - Budget deficit o A shortfall of tax revenue from government spending o G – T o Negative public saving The Meaning of Saving and Investment - Private saving o The income remaining after households pay their taxes and pay for consumption - Examples: This is what households do with savings o Buy corporate bonds and equities o Purchase a Certificate of deposit at the bank Certificate of deposit = time deposit o Buy shares of a mutual fund o Let accumulate in saving or checking accounts - Investment o The purchase of new capital - Examples: Investment o General Motors spends 250 million to build a new factory in Flint, Michigan o You buy 5000 dollars worth of computer equipment for your business o Your parents spend 300,000 to have a new house built - In economics investment is not the purchase of stocks and bonds The market of Loanable Funds - Supply- demand model of the financial system - Helps us understand o How the financial system coordinates saving and investment o How government policies and other factors affect saving, investment, the interest rate - Assuming only one financial market o All savers deposit their saving in this market o All borrowers take out loans from this market o There is one interest rate, which is both the return and the cost of borrowing - The supply of loanable funds comes from saving o Households with extra income can loan it out and earn interest o Public saving, if positive, adds to national saving and the supply of loanable funds o If negative it reduces the national saving and the supply of loanable funds The Slope of the Supply Cure - an increase in interest rate makes saving more attractive which increases the quantity of loanable funds supplies The Market of Loanable Funds - The demand for loanable fund comes from investment o Firms borrow the moneys needed to pay for new equipment, factories and etc. o Households borrow the funds to purchase new houses The Slope of the Demand Curve - a fall in interest rate reduces the cost of borrowing, which increases quantity of loanable funds demanded - low interest rate stimulates borrowing and investing Equilibrium - Interest rate adjusts to equate supply and demand - The equilibrium quantity of loanable funds equals equilibrium investment and saving Policy 1 - Tax incentives for saving increase the supply of loanable funds - This reduces the interest rate and increases the quantity of loanable funds Policy 2 - Investment tax credit increase the demand of loanable funds - This raises the interest rate and increases the quantity of loanable funds Other Factors that will shift Savings or investments - Savings o Changes in income o Expectations - Investment o Technological Progress o Expectations Budget Deficit, Crowding Out, and Long Run Growth - Increase in budget deficit causes fall in investment - The government borrows to finance its deficit, leaving less funds available for investment – called crowding out - Investment is important for long run economic growth. Budget deficits reduce the economy’s growth rate and future standard of living.