Chapter 13 Savings Investments and the Financial System Financial System the group of institutions that helps match the saving of one person with the investment of another Financial Markets Institutions through which savers can directly provide funds to borrowers Ex Bond a certificate of indebtedness Ex Stock a claim to partial ownership in a firm Financial Intermediaries Institutions though which savers can indirectly provide funds to borrowers Ex Banks Ex Mutual Funds Institutions that sell shares to the public and uses the proceeds to buy portfolios of stocks and bonds Different Kinds of Savings Private saving the portion of households income that is not used for consumption or paying taxes Private Saving Y T C Public Saving Tax revenue the government has left after paying for its spending Pubic Saving T G National Saving The portion of national income that is not used for consumption or government purchases Private Saving Public Saving National Saving Y C G National Income in a closed economy Y C I G Saving Investments I Y C G I S Budget Surplus T G Budget Surplus Public Savings Budget Deficit G T Budget Deficit Public Saving Budget Surplus An excess of tax revenue over government spending T G Budget Deficit A short fall of tax revenue from government spending G T The Meaning of Saving and Investment Private Saving The income remaining after households pay their taxes and pay for consumption Investment the purchase of new capital The Market for Loanable Funds Supply Savings An increase in interest rate makes saving more attractive which increases the quantity of loanable funds supplied Demand Investments A fall in interest rates reduces the cost of borrowing which increases the quantity of loanable funds demanded Policy 1 Saving Incentives Tax incentives for saving increases the supply of loanable funds Increasing the supply reduces the equilibrium interest rate and increases the equilibrium quantity of loanable funds Policy 2 Investment Incentives An investment tax credit increase the demand for loanable funds Increasing the demand raises the equilibrium interest rate and increases the equilibrium quantity of loanable funds Budget Deficits Crowding out and Long Run Growth Increase in budget deficit causes fall in investment Crowding Out The government borrows to finance its deficit leaving less funds available for investment Chapter 16 The Three Functions Money Medium of Exchange item buyers give to sellers when they want to purchase a good or service Unit of Account the yardstick people use to post prices and record debts Store Value an item people use to transfer purchasing power from the present to the future The Two Kinds of Money Commodity Money takes the form of a commodity with intrinsic value Ex Gold coins Beanie Babes Fiat Money money without intrinsic value used as money because of government decree Ex U S dollar The Money Supply Money stock the quantity of money available in the economy Parts of Money Supply Currency the paper bills and coins in the hands of the non bank public Demand Deposits balances in bank accounts that depositors can access on demand by writing a check Central Banks and Monetary Policy Central Bank an institution that oversees the banking system and regulates the money supply Monetary Policy The setting of the money supply by policymakers in the central bank Federal Reserve Fed the central bank of the U S Bank Reserves In a fractional reserve banking system banks keep a fraction of deposits as reserves and use the rest to make loans The reserve ratio R fraction of deposits that banks hold as reserves Total reserves as a percentage of total deposits Bank T Accounts T account a simplified accounting statement that shows a bank assets and liabilities Liabilities include deposits Assets include loans and reserves The Money Multiplier the amount of money the banking system generates with each dollar of reserves Money multiplier 1 R The Fed s 3 Tools of Monetary Control 1 Open Market Operations OMOs the purchase and sale of U S government bonds by the Fed To increase money supply fed buys government bonds paying with new dollars increases revenue causes money supply to expand To reduce money supply Fed sells government bonds taking dollars out of circulation and the process works in reverse 2 Reserve Requirements RR Affect how much money banks can create by making loans 3 The Discount Rate the interest rate on loans the fed makes to banks When banks are running low on reserves they may borrow reserves from the fed Feds can raise lower discount rate The Federal Funds Rate interest rate on loans for when banks with insufficient reserves borrow from banks with excess reserves Chapter 17 The Value of Money P the price level e g the CPI or GDP deflator Value of Money 1 P The price of a basket of goods measured in money An increase in P reduces the value of money so more money is required to buy g s As the value of money rises the price level falls The fall in the value of money or increase in P increases the quantity of money demanded Nominal Variables measured in monetary units Real Variables measured in physical units Relative Price The price of one good relative to divided by another Real Wage W Nominal wage Price of labor P price level Price of g s Real Wage W P Classic Dichotomy the theoretical separation of nominal and real variables If central bank doubles money supply nominal variables double real variables remain unchanged Monetary Neutrality the proposition that changes in the money supply do not affect real variables Velocity of Money the rate at which money changes hands P x Y nominal GDP Price level x Real GDP M Money supply V Velocity Velocity V P x Y M Seigniorage the revenue raised from printing money Inflation and interest Rates Nominal interest rate i Real interest rate r r i pi Fisher effect Chapters 19 and 20 in an open economy Trade surplus exports imports Size of trade surplus NX Trade deficit imports exports Size of trade deficit NX Net capital outflow S I Net flow of Loanable funds Net purchases of foreign assets When S I country is a net lender When S I country is a net borrower Market for Loanable Funds S I NCO S Savings I Domestic Investment NCO Net Capitol Overflow D I NCO
View Full Document
Unlocking...