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Chapter 13 notes

by: Julie Palatella

Chapter 13 notes EC 111

Julie Palatella

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Principles of Macroeconomics
Class Notes
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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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