DOC PREVIEW
UA EC 111 - Saving and Investing
Type Lecture Note
Pages 4

This preview shows page 1 out of 4 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 4 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 4 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

EC 111 1st Edition Lecture 9PREVIOUS LECTUREI. Problems With The CPI: Substitution BiasII. Problems With The CPI: Introduction of New GoodsIII. Problems With The CPI: Unmeasured Quality ChangeIV. Problems With The CPIV. Contrasting The CPI And GDP DeflatorVI. Correcting Variables For Inflation: Comparing Dollar Figures From Different TimesVII. Correcting Variables For Inflation: IndexationVIII. Correcting Variables For Inflation: Real Vs. Nominal Interest RatesCURRENT LECTUREI. Financial InstitutionII. Different Kinds of SavingsIII. National SavingsIV. Saving and InvestmentV. Budget Deficits and SurplusesVI. The Meaning of Saving and InvestmentVII. The Markets for Loanable FundsVIII. The Slope of the Supply CurveIX. The Slope of the Demand CurveX. Policy 1: Saving IncentivesXI. Policy 2: Investment IncentivesXII. Other Factors That Will Shift Savings or InvestmentsFINANCIAL INSITUTION- Financial System: the group of institutions that helps match the savings of one person with the investment of another- Financial Markets: institutions through which savers can DIRECTLY provide funds to borrowers- The Bond Marketo A certificate of indebtedness- The Stock Marketo A certificate of ownership- Financial Intermediaries: institutions through which savers can INDIRECTLY provide funds to borrowerso Bankso Mutual Funds: institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bondsDIFFERENT KINDS OF SAVINGS- Private Saving: the portion of household’s income that is not used for consumption or paying taxeso =Y-T-C- Public Savings: tax revenue less government spendingo =T-GNATIONAL SAVING- National Saving=Private Saving+Public Saving o =(Y-T-C)+(T-G)---Y-C-G- National saving is the portion of national income that is not used for consumption or government purchases SAVING AND INVESTMENT- Recall the national income accounting identity (Y=C+I+G+NX)o To simplify we will focus on a closed economy (no imports or exports) Y=(C+I+G)- Solve for I=Y-C-Go (Y-T-C)+(T-G)  This is the national savingsBUDGET DEFICITS AND SURPLUSES- Budget Surplus: an excess of tax revenue over government spending o T-Go Public savings- Budget Deficits: a short fall of tax revenue over government spendingo G-To –(public savings)o If you are given a budget deficit and asked to find public savings, just put a negative sign in frontTHE MEANING OF SAVING AND INVESTMENT- Private Saving: the income remaining after households pay their and payfor consumption- Examples of what households do with savings: o Buy corporate bonds or equities o Purchase a CD at the banko Buy share of mutual funds o Let it accumulate in a savings or checking account- When you buy stocks , bonds, etc, we call it savings in economics- Investment: the purchase of new capitalo GM spends money to build new planto A company buys computer equipment for their business- In economics, investment is NOT the purchase of stocks or bondsTHE MARKET FOR LOANABLE FUNDS- A supply demand model of the financial system- Helps us understand o How the financial system coordinates savings and investmento How government policies affect saving, investment and the interest rate- Assume: only one financial marketo All savers deposit their savings in this marketo All borrowers take out loans from this marketo There is one interest rate which is rate of return for saving and the cost of borrowing - The supply of loanable funds comes from savings o Households with extra income can loan it out and earn interesto Public saving, if positive, adds to the national savings and supply of loanable fundso If public savings is negative it reduces national savings and the supply of loanable funds This has a special name which we will learn laterTHE SLOPE OF THE SUPPLY CURVE- An increase in the interest rate makes saving more attractive, which increases theamount of loanable funds supplied- Supply=savings- Demand=investments- The demand for loanable funds comes from investmentso Firms borrow the funds they need to pay for new equipment etc.o Households borrow funds they need to purchase new houses etc.THE SLOPE OF THE DEMAND CURVE- A fall in the interest rate reduces the cost of borrowing, which increases the quantity of loanable funds demanded- The interest rate adjusts to equate supply and demand- This interest rate is the real interest rate- The equilibrium quantity is where the supply and demand curve crossPOLICY 1: SAVING INCENTIVES- Tax incentives for saving increase the supply of loanable funds which reduces the equilibrium interest rate and increases the equilibrium quantity of loanable fundsPOLICY 2: INVESTMENT INCENTIVES- An investment tax credit increases the demand for loanable funds which raises the equilibrium interest rate and increases the equilibrium quantity of loanable fundsOTHER FACTORS THAT WILL SHIFT SAVINGS OR INVESTMENTS- Savingso Changes in incomeo Expectations- Investmentso Technological progress  ALWAYS SHIFTS DEMANDo Expectations- This is a different market. It is not the traditionally supply and demand- Companies have to invest in new technologies- Shark tank is the best example of expectations of


View Full Document
Download Saving and Investing
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Saving and Investing and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Saving and Investing 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?