Econ201 Exam 2 Study Guide Chapter 13 Saving Investment Financial financial markets financial institutions thru which savers can directly provide funds to borrowers bond certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond stock claim to partial ownership in a firm financial intermediaries financial institutions thru which savers can indirectly provide funds to borrowers banks mutual funds mutual funds institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks bonds Saving National saving total income in the economy that remains after paying for consumption and government purchases denoted as S to substitute for Y C G S I Private saving income that households have left after paying for taxes and consumption Y T C Public saving tax revenue that the government has left after paying for its spending Y G C Budget surplus excess of government receipts over government spending T G Budget deficit shortfall of tax revenue from government spending G T Loanable funds all income that people have chosen to save and lend out and to the amount that investors have chosen to borrow to fund new investment projects Loanable Funds Chapter 16 Monetary System 3 Functions of Money medium of exchange what you use to buy goods services unit of account how to measure prices and debts store of value measuring purchasing power from present to future 2 Kinds of Money Bank Reserves commodity item with intrinsic value gold coins cigarettes in POW camps fiat money without intrinsic value used as money b c of gov t decree fractional reserve banking system banks keep a fraction of deposits as reserves to make loans reserve ratio R total reserves as a of total deposits reserves deposits Fed s 3 Tools of Monetary Control 1 Open Market Operations OMOs purchase and sale of gov t bonds by the Fed 2 Reserve Requirements RR affect how much money banks can create by making loans 3 Discount Rate interest rate on loans the Fed makes to banks Federal Funds Rate federal funds rate interest on loans that banks with excess reserves make to banks with insufficient reserves Chapter 17 Money Growth Inflation Real vs Nominal nominal variables measured in monetary units dollars real variables measured in physical units output quantity o Wage relative price price of one good divided by another measured in units real variable o W nominal wage price of labor 15 hour o o P price level price of goods services 5 cupcake Real wage price of labor divided by price of output W P 15 hour 5 cupcake 3 cupcakes hour Velocity of Money PxY nominal GDP price level x real GDP M money supply V velocity V PxY M MxV PxY Seigniorage revenue raised from printing money causes inflation Chapter 18 19 Open Economy Macro Saving private saving Y T C income not used for taxes or consumption public saving T G tax revenue minus gov t spending national saving Y C G national income not used for consumption or gov t purchases in a closed economy saving investment Y C G crowding out when the gov t borrows money to finance its own debt less funds available for investment National Income Identity in an Open Economy when saving is greater then investment country is a net lender when investment is greater then saving country is a net borrower Balanced Trade NCO 0 imports exports investment saving Y C I G NX 0 Market for Loanable Funds supply of loanable funds saving national saving demand for loanable funds I NCO Exchange Rates nominal exchange rate e price of US currency in terms of foreign currency real exchange rate epsilon price of US good in terms of foreign goods Big Mac example Market for Foreign Currency Exchange r eP Px NCO NX net exports exports imports also known as trade balance net capital outflow purchase of foreign assets by domestic residents purchase of domestic assets by foreigners NX is the demand for dollars foreigners need dollars to buy US exports NCO is supply of dollars US residents sell dollars to obtain foreign currency for foreign assets In an open economy domestic supply of loanable funds comes from national saving In an open economy source of demand in foreign currency exchange market is net exports Capital flight NCO demand curve shifts right on LF diagram as people move investments out of unstable country causes QLF and real interest rate to rise o If real interest rate rises NCO demand curve shifts right on foreign exchange rate diagram Effects of a Budget Deficit national saving falls real interest rate rises investment NCO fall NX falls Real exchange rate goes up Aplia Info to Know Trade of goods services o Buying beer from Mexico BOTH import investment o Buying Mexican beer in US consumption NOT import Flow of Capital Goods o Y C I G NX S Y C G o S I NX o S I NCO o
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