Chapter 8 – Savings, Investment and the Financial SectorMotivation – Y/L = Af(K/L, H/L,N/L)- Increases in K/L result in increased _____________ and increased__________.- ____________________ in the economy is what results in greater capital.- Businesses get their money for investment spending from______________.- Financial Sector plays an important role in ____________ savingsto Investments spending.BondsBonds normally consist of:1. Face Value - Value that lender receives at maturity2. Coupon rate – fixed or variable rate paid to lender: Rate is determined by:1. _______________________ - ___________ of a company going bankrupt. Higher risk, _____ return.2. ___________ of Bond: _____ term bonds usually pay ______ rates due to ________ chance of default.3. _________________-People have to pay taxes on most interest income. However bonds issued by __________ are tax exempt and thus are likely to pay ______ rates.Advantages DisadvantagesRank the following bonds from lowest to highest return.Joey Startup, The State of New York, McDonalds,..Stocks Savers make money on stocks with1. Dividends2.Capital GainsPrice of stock determined by:Efficient Market hypotheses predicts that the value of the stock shouldalways be a true reflection of the value of the _________.This is true during __________ but not during ___________.Performance of stocks measured ___________Advantages DisadvantagesVanguard Capital Opportunity Fund Investor SharesSources of SavingsReview: Income = RGDP = Y= ___ +___+ ___+____Where does Savings come from?Private saving ___ - Portion of households’ income that is not used for ____________ or paying ___________.Sp = Public Saving (or government saving) ____ - Portion of Government’s income left over after it pays it’s bills _______Sg= National Savings - Money available for firms to borrow: SN = _____ + ______ (write out the equations for each)SN= ______________ + ___________SN= ______________SN –is the portion of national income that it is not used for ___________ or _____________.What is the relationship between Savings and Investment?Remember that Y= ___ +___+ ___+____ For the rest of the chapter we will assume tht the economy is close meaning NX = _______Thus that Y= ___ +___+ ___ (solve for I)I = Thus in a closed economy_____ =______ (and the ______ will adjust to assure that this always holds)Summary: In the long-run, if C decreases, we still have the same amount of resources to produce goods and services. So Output will _____________. If C falls, Savings will ______, which will eventually callInvestment to ______ and keep output ______________. This will happen in the market for loanable funds. Market for Loanable FundsA supply-demand model of the financial system Helps us understand how the financial system coordinates saving & investment how govt policies and other factors affect saving, investment, the interest rateAssume: only one financial market All savers deposit their saving in this market. All borrowers take out loans from this market. There is one interest rate, which is both the _____________ and the _________________.The __________________ will adjust to equate supply and demand and thus ________ and _________.Supply of Loanable Funds Comes from __________SLF = ___________ = ___________ + ______________Examples of Private Savings are: If SG >0, this adds to national saving and ______ the supply of funds.If SG<0, this reduces national savings and _____ the supply of funds.- The Main determinant of how much people save is the ________________.interest rateQuantity of Loanable FundsAt low interest rates, the return on saving will be ____, so people will save ________. As the interest rate increases the return on saving _____,thus people save ______. Thus the Supply curve is ___________.Shifts in the Supply curveFactors other than the _______ will cause a shift of the curve. Three factors are:1) Change in household preferences with regards to savings2) Taxes on Savings – people must pay taxes on income earned from savings.3) Change in Government Spending or Taxes.An increase in Savings interestQ of Loanable fundsAt every interest rate the supply is ____ so the curve shifts ______.This would happen if:1) Households become more __________2) There is a ________ in taxes on Savings3) A decrease in the budget _______ or increase in the budget _______.A decrease in savingsinterest SLFQLFAt every interest rate the supply is _____ so the curve shifts _______.This would happen if:1) Households become less __________2) There is a ________ in taxes on Savings3) A decrease in the budget _______ or increase in the budget _______.Demand for Loanable Funds Or ________________The demand for loanable funds comes from ______________:  Firms borrow the funds they need to pay for_______________________. Households borrow the funds they need to purchase_______________.The slope of the Demand for Loanable Fundsinterest rateQuantity of Loanable FundsThe main determinant of the cost of borrowing funds is the ______. At a low interest rate the cost will be _____, so firms and households will borrow ______. (demand will be ____). As the interest rate rises, the cost _____, cause firms and households to borrow _____. Quantity demanded _____.Thus the Demand for Loanable funds is ___________ sloped.Shifts in the Demand curveAn increase in demand interestQ of Loanable fundsAt every interest rate the demand is ____ so the curve shifts ______.1) _________ of a tax credit on investment spending2) Businesses become more _________ about the future.A decrease in demandinterestDLFQLFAt every interest rate the demand is _____ so the curve shifts_______.1) _________ of a tax credit on investment spending2) Businesses become more ___________ about the future.EquilibriumThe ________ adjusts to equate __________ and _________If r is too high (8%) DLF ( ) __ SLF ( ) we have a ____ of funds so r will _____.If r is too low(4%) DLF( ) ____ SLF ( ) we have a ________ of funds so r will _____.Policies to promote Investment and thus economic growthI. Policy 1 – Altering Saving Incentives Suppose the government cuts the capital gains tax which allows households to keep more of their savings.At every interest rate, ____________ would be greater, ___________________.At the current interest rate there would be a __________ of loanable funds. This