Chapter 13 notes
Chapter 13 notes EC 111
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This 3 page Class Notes was uploaded by Julie Palatella on Sunday March 6, 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 19 views. For similar materials see Principles of Macroeconomics in Economcs at University of Alabama - Tuscaloosa.
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Date Created: 03/06/16
Chapter 13 Financial Markets- institutions through which savers directly provide funds to borrowers Bond- certificate of indebtedness Stock- claim to partial ownership in a firm Financial intermediaries- institutions through which savers can indirectly provide funds to borrowers Banks Mutual funds- institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds Private Saving- portion of households’ income that is not used for consumption or paying taxes (Y-T-C) Households can buy corporate bonds/equities, purchase a certificate of deposit at the bank, buy shares of a mutual fund, accumulate in saving or checking accounts Public Saving- tax revenue less government spending (T-G) National Saving- private saving + public saving (Y-T-C) + (T-G) = Y- C- G The portion of national income that is not used for consumption or governmental purchases Saving = Investment in a closed economy I = Y-C-G = (Y-T-C) + (T-G) 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 saving) If you are given budget deficit and asked to find public saving just put a “-“ in front of it Investment- purchase of new capital The Market for Loanable Funds Supply-demand model of the financial system Helps us understand the financial system coordinates with saving & investment and how govt. policies and other factors affect saving, investment and the interest rate Assume: only one financial market o All savers deposit their saving in this market o All borrowers take out loans from this market o One interest rate, which is both the return to saving and the cost of borrowing The supply of loanable funds come from saving: o Households with extra income can loan it out and earn interest o Public saving, if positive, adds to national saving and supply of loanable fund o If negative, it reduces national saving and the supply of loanable funds The demand for loanable funds comes from investment: o Firms borrow the funds they need to pay for new equipment, factories, etc o Households borrow the funds they need to purchase new houses Slope of the Demand Curve Fail in the interest rate reduces the cost of borrowing which increases the quantity of loanable funds demanded Lowering interest rates makes borrowing money look more attractive Equilibrium Interest rate adjusts to equate supply and demand and this interest rate is the real interest rate Equilibrium Quantity of L.F. = equilibrium investment and equilibrium saving Saving incentives Tax incentives for saving increases the supply of LF which reduces the equilibrium interest rate and increases the equilibrium quantity of LF Investment Incentives Investment tax credit increases the demand for LF which raises equilibrium interest rate and increases the equilibrium quantity of LF Other Factors that will shift Savings or Investment Savings- changes in income, expectations Investment- technological progress, expectations Crowding Out- Increase in budget deficit causes fall in investment so the government borrows to finance its deficit, leaving less funds available for the investment Investment = important for long-run economic growth
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