ECON 2105 1nd Edition Lecture 23 Outline of Last Lecture I. Out Demand of Money II. Money Demand Curve Outline of Current Lecture I. Savings Current LectureModule 29I. Saving - Three major savers in the nationo The private sectoro The public sectoro The foreign savers- overseas want to put some savings in the US - Budget Balance: (the govt) government revenues minus government spending o Revenues include: taxes (income or on corporations), tariffs on foreigners o Spnding- on goods and services, defense, education, unemployment, medicare, social security o Net saver or net spender o If negative  we are in budget deficit - Net Capital inflow (NCI): amount of money coming from overseas, capital inflow- capital outflow o Capital inflow  they buy our bonds, they buy our stocks, we sell them things o capital outflow: Investments French stock we buy, German bondwe buy o if NCI is positive we are net borrowers (we have been like this since 1981, bc us consumption is higher than our production)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o if NCI is negative we are net lenders- investment Spending – spending on physical capital o Buying stocks, bonds, or gold is NOT considered as investment spending (it can be called as “making an investment”, the act of purchasing an asset)o When macroeconomists use the term investment spending, they almost always mean spending on new physical capital.o Only spending that adds to the economy’s stock of physical capital is investment spending. - In the US investment spending > national spending (public an private) + private spending o Savings= private savings + public savings o Private= real gdp + transfer payments – taxes – consumption o Public= revenues- expenses - The Market for Loanable Funds o The loanable funds market is a __hypothetical___ market that examines the market outcome of the demand for funds generatedby __borrowers (entrepreneurs)__ and the supply of funds provided by __savers__.o The loanable funds market is a simplified market that includes the many different financial markets, such as the stock and bond markets.- Return on investment spending o The rate of return on a project is the profit earned on the project expressed as a percentage of its cost.o- demand for loanable fund = investment spending + budget deficit o This is downward sloping because the higher interest rate the less likely people will buy o Why is it downward sloping? We have a hidden assumption that investment spending requires providing funds from the financial markets, and at higher interest rates, there are _fewer_ investment projects that will stay profitable even at high interest rates.- Supply of Loanable Funds o Private savings and NCI make it up o Its is upward sloping bc with higher interest rate you earn more profito As rate goes up  opportunity cost of holding money increases money holdings will go down  more money into savings - Equilibrium in the loanable funds market - Shifts of the demand for loanable funds o Factors that can cause the demand curve for loanable funds to shift include:o Changes in perceived business opportunities (investment spending) o Changes in the government’s borrowing (more govt spending increases demand) o Crowding out- higher government borrowing  r goes up  investment spending goes down - Shifts of the supply for loanable funds o Factors that can cause the supply of loanable funds to shift include:o Changes in private savings behavior (income, consumer confidence) o Changes in capital inflows- Inflation and interest rates o Anything that shifts either the supply of loanable funds curve or the demand for loanable funds curve changes the interest rate. o Historically, major changes in interest rates have been driven by many factors, including:o changes in government policy. o technological innovations that created new investment opportunities.o How about the inflation expectations?- The Fisher Effect o According to the Fisher effect, an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate