Zara Mahmood Oct 17 2013 EC102 Lecture 9 The Loanable Funds Market The Macroeconomics of Savings and Investment Fundamental Identity o Savings S Investment I Banks loan saved money for investment spending In a closed economy NX 0 Y C I G NX Y C I G I Y C G Financial System The system of financial markets and financial intermediaries through which firms acquire funds from households Well developed financial system leads to economic growth Financial Markets Markets where financial securities such as stocks and bonds are bought and sold An Overview of the Financial System Financial system channels funds from savers to borrowers and channels returns on borrowed funds back to savers Financial security document that states the terms under which funds pass from the buyer of the security who is providing funds to the seller Stocks Are financial security that represent ownership of a firm Bonds Are financial securities that represent promises to repay a fixed amount of funds interest Financial Intermediaries and insurance companies that borrow funds from savers and lend them to borrowers Firms such as banks mutual funds pension funds Open vs Closed Economies Closed An economy which has no interaction with other economies Open o No trade in goods and services o No trade in financial assets An economy which has interaction with the rest of the world o Trade in goods and services o Trade in financial assets Private Saving Saving Income Expenditure For households and firms o Income Y TR transfer payments o Expenditures C T tax SavingPRIVATE Y TR C T Zara Mahmood Oct 17 2013 EC102 Public Saving Saving Income Expenditures For government o Income T tax o Expenditure G TR SavingPUBLIC T G TR o During debt savings is negative Public Saving and Dissaving Savingpublic T gov revenue G TR gov expenditure o T G TR Savingpublicpositive o T G TR No public saving Balanced budget o T G TR Savingpublicnegative public dissaving deficit China has lent 20 of what we spend take in National Saving S Y TR C T T G TR S Y C G National Saving S SavingPRIVATE SavingPUBLIC Investment I Y C G S Y C G o S I As soon as you put money in the bank etc you are investing The Market for Loanable Funds Market for Loanable Funds determines the market interest rate and the quantity of loanable funds exchanged The interaction of borrowers and lenders that o Composed of the diverse markets which make up the financial system Eg bond market stock market bank loans mutual funds Supply of Funds Private savings Public Savings Demand of Funds Companies Governments Consumers Financial Markets Bond Market Mutual Funds Stock market Bank loans Zara Mahmood Oct 17 2013 EC102 Demand and Supply in the Loanable Funds Market Increase in Demand for Loanable Funds Due to an Improvement in Technology Demand curve shifts right o Higher quantity demanded at any interest rate Decrease in Demand for Loanable Funds Due to Increasing Business Pessimism Demand curve shifts left o Lower quantity demanded at any interest rate Increase in Supply for Loanable Funds Due to Increase in the Private Saving Rate Supply curve shifts right o Savings rate increased because people were scared o More funds available to governments and firms Decrease in Supply for Loanable Funds Due to an Increase in Govt Spending Supply curve shifts left o Larger government deficit national saving goes down o Supply of loanable funds also goes down o Interest rate increases Zara Mahmood Oct 17 2013 EC102
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