Econ 202 1st Edition Lecture 18Outline of Last Lecture I. The relationship between savings and investment spending II. Aspects of the loanable funds market, which shows how savers are matched with borrowersIII. The need for a sound financial systemOutline of Current Lecture I. Shifts in supplyII. Fisher effectCurrent LectureI. Shifts of the Supply of Loanable Fundsa. Factors that can cause the supply curve for loanable funds to shift include:i. 1.changes in private savings behavior.ii. 2.changes in net capital inflows.II. Inflation and Interest Ratesa. Anything that shifts either the supplyof loanable funds curve or the demand for loanable funds curve changes the interest rate.i. Major changes in interest rates have been driven by many factors, including:1. changes in government policy. 2. technological innovations that created new investment opportunities.But most important, people’s expectations about future inflation.Real interest rate = nominal interest rate –inflation rate.III. The fisher effecta. According to the Fisher effect, an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged.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.IV. Three Tasks of a Financial Systema. Task 1: reducing transaction costsi. Transaction costs:the expenses of negotiating and executing a deal.V. Task 2: reducing riska. Financial risk: uncertainty about future outcomes that involve financial losses or gains.b. Diversification:investing in several assets with unrelated, or independent, risks; reduces risk.VI. Task 3: providing liquiditya. Liquidity:a measure of how quicklyan asset can be converted into cash with relatively little loss of value.i. If it can be converted quickly, it’sliquid; if not,
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