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financial system |
the group of institutions that helps match the saving of one person with the investment of another |
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Financial markets |
institutions through which savers can directly provide funds to borrowers |
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Examples of financial markets |
The Bond Market, The Stock Market |
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bond |
certificate of indebtedness |
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stock |
claim to partial ownership in a firm |
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Financial intermediaries |
institutions through which savers can indirectly provide funds to borrowers |
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Examples of Financial intermediaries |
Banks, Mutual funds |
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Mutual funds |
institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds |
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Different Kinds of Saving |
Private saving, Public saving |
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Private saving |
The portion of households’ income that is not used for consumption or paying taxes = Y-T-C |
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Public saving |
Taxes-G |
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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 government purchases |
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Solve for I: |
I = Y-C-G = (Y-T-C)+(T-G) |
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Budget Surpluses |
an excess of tax revenue over govt spending = T-G = public saving |
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Budget deficit |
a shortfall of tax revenue from govt spending = G-T = -(public saving) |
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Saving |
investment in a closed economy |
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Investment |
purchase of new capital |
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In economics,__________ is NOT the purchase of stocks and bonds! |
investment |
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Public saving, if positive,______ to national saving and the supply of loanable funds. |
adds, reduces |
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An increase in the interest rate makes saving more attractive so it then increases |
the quantity of loanable funds supplied. |
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The supply of loanable funds comes from |
saving |
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A fall in the interest rate reduces the cost of borrowing which means… |
increases the quantity of loanable funds demanded(more people want to borrow) |
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Tax incentives for saving(putting money into bank) increase __________ |
the supply of L.F. |
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A budget deficit reduces |
national saving and the supply of L.F |
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When there is less L.F, interest rates…causing a …. in investment |
increase decrease |
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The govt borrows to finance its deficit, leaving… |
less funds available for investment, called crowding out. |
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budget deficits reduce the economy’s… |
growth rate |
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Financial markets help allocate the economy’s scarce resources to their…. |
most efficient uses |
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The demand for funds comes from… |
investment |
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physical capital |
manufactured resources |
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human capital |
improvement in the labor force |
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financial capital |
funds from savers(lenders) available for investment |
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The sale of stocks to raise money is called |
equity finance |
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the sale of bonds to raise funds |
debt finance |
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A mutual fund is |
is a financial institution that stands between savers and borrowers. is a financial intermediary. allows people with small amounts of money to diversify their holdings |
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Banks play a role in creating an |
asset that people can use as a medium of exchange |
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A bond buyer is a |
saver. Long term bonds have more risk than short term bonds |
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identity that shows that total income and total expenditure are equal |
Y = C + I + G + NX |
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T – G |
public saving |
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Y – T – C |
private saving |
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national savings equal |
public saving + private savings |
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When a country saves a larger portion of its GDP than it did before, it will have |
more capital and higher productivity |
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Suppose a country’s debt is smaller in 2011 than in 2010,we would expect |
lower interest rates in 2011 which increases greater investment in 2011 than in 2010 |
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We interpret the term loanable funds to mean the flow of resources available to fund private investment |
true |
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Lenders(savers) buy bonds and borrowers sell them |
true |
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Generally, if people begin to expect a company to have higher future profits, the price of the company’s stock will begin to decrease |
false |
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If there is a surplus of funds, interest level would be… |
above the equilibrium |
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An increase in the budget deficit shifts the demand for loanable funds to the right |
false |
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If the government’s spends more than in takes in, it would ___ bonds |
sell bonds directly to the public |
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loanable funds means the same thing as |
investment |
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If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, |
there is a shortage and the interest rate is below the equilibrium level, shortage=below |
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If the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded, the interest rate is |
above equilibrium, surplus=higher |
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If the demand for loanable funds shifts to the right, then the equilibrium interest rate |
and quantity of loanable funds rise. |
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Other things the same, a government budget deficit |
reduces both public and national saving |
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Crowding out occurs when investment declines because |
a budget deficit makes interest rates rise. |
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We interpret the meaning of "loanable funds" as the |
flow of resources available to fund private investment |
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If you were to start a business delivering documents, you might need to purchase cell phones, bicycles, desks, and chairs |
These purchases are called capital investment. If you raise the funds to purchase them from others you are a borrower. |
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If there is a surplus of loanable funds, then |
the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium |
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Other things the same, when the interest rate rises, |
people would want to lend more, making the quantity of loanable funds supplied increase. |
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A bond buyer is a |
saver. Bond buyers may sell their bonds prior to maturity. |
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A government budget deficit affects the supply of loanable funds, rather than the demand for loanable funds, because |
in our model of the loanable funds market, we define "loanable funds" as the flow of resources available to fund private investment. |
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