Chapter13Savings Investment FinancialSystemA FinancialInstitutionsa TheFinancialsystem thegroupofinstitutionsthathelpsmatchthesavingofonepersonwiththeinvestmentofanother theentirenetworkofinstitutions laws regulations andmarketparticipants b TheFinancialmarkets institutionsthroughwhichsaverscandirectlyprovidefundstoborrowers Whereindividuals businesses andgovernmentscometogethertotradefinancialassetssuchasstocks bonds commodities andcurrencies i Examples 1 Thebondmarket Abondisacertificateofindebtedness 2 Astockisaclaimtopartialownershipinafirm c Financialintermediaries institutionsthroughwhichsaverscanindirectlyprovidefundstoborrowers i Example 1 Banks2 Mutualfunds Institutionsthatsellsharestothepublicandusetheproceedstobuyportfoliosofstocksandbonds d Conclusion Insummary thefinancialsystemistheoverarchingstructure financialmarketsarethevenuesforassettrading andfinancialintermediariesaretheentitiesthatfacilitatetheflowoffundsbetweensaversandborrowers B DifferentKindsofSavingsa Privatesavings households i Theportionsofhouseholdsincomethatisnotusedforconsumptionorpayingtaxes ii Y T Ciii Y totalincomeiv T Taxesv C consumptionb i Taxrevenuelessgovernmentspendingii T Gc NationalSavingi Privatesaving publicsavingii Y T C T G iii where theTcancelsout iv Theportionofnationalincomethatisnotusedforconsumptionorgovernmentpurchases Chapter13Savings Investment FinancialSystemC SavingsandInvestmenta Firstrecallthenationalincomeaccountingidentity Fortherestofthischapter focusontheclosedeconomycase SolveforI Nationalsaving 1 1 nationalsavingSaving investmentinaclosedeconomy D BudgetDeficitsandSurplusesa Budgetsurplusi Anexcessoftaxrevenueovergovtspendingii 1 iii Publicsavingb Budgetdeficiti Ashortfalloftaxrevenuefromgovtspendingii Govtspendingismorethanthetaxrevenueiii wouldbenegative1 E ThemeaningofSavingandInvestment 13 06 26 14 a Privatesavingistheincomeremainingafterhouseholdspaytheirtaxesandpayforconsumption b Examplesofwhathouseholddowithsaving i Buycorporatebondsandequitiesii Purchasesacertificateofdepositiii Buysharesofamutualfund iv Letaccumulateinsavingorcheckingaccountc Investmentisthepurchaseofnewcapital d Exampleofinvestment Chapter13Savings Investment FinancialSystemi GeneralMotorsspends 250milliontobuildanewfactoryinFlint Michigan ii Youbuy 5000worthofcomputerequipmentforyourbusiness iii Yourparentsspend 300 000tohaveanewhousebuilt REMEMBER INECONOMICS INVESTMENTISNOTTHEPURCHASEOFSTOCKSANDBONDS PERHAPSINVESTMENTISPURCHASEOFNEWCAPITAL F TheMarketofLoanableFundsa Asupply demandmodelofthefinancialsystem b Helpusunderstandi Howthefinancialsystemcoordinatessavings investment ii Howthegovernmentpoliciesandotherfactorsaffectsaving investment andtheinterestrate c Assume onlyonefinancialmarket i Allsaversdeposittheirsavingsinthismarket ii Allborrowerstakeoutloansfromthismarket iii Thereisoneinterestrate whichisboththereturnofsavingandthecostofborrowing iv Thereisoneinterestrate whichisboththereturntosavingandthecostofborrowing Thesupplyofloanablefundscomesfromsaving a Householdswithextraincomecanloanitoutandearninterest b Publicsaving ifpositive addstonationalsavingandthesupplyofloanablefunds TheSlopeoftheSupplyCurveSupplyupwardslopecurvewouldbethehouseholdwhowantstolendorloanourtheirmoneyDemanddownwardslopewouldbethebanksandfinancialinstitutionasfallintheinterestratereducesthecostofborrowing whichincreasesthequantityofloanablefundsdemanded Chapter13Savings Investment FinancialSystem Theinterestrateadjuststoequaresupplyanddemand TheequilibriumquantityofL Fequalseq minvestmentandeq msaving SupplyCurve Whatifthegovtwantstoincreaseinsensitivity theirtaxincentiveforsavingincreasesthesupplyL F Everydollaryousave therewillbenotaxonit Whichthenreducestheeq minterestrateandincreasestheeq mquantityofL F Whentheloanablefundsincreasethentherewouldbeadropofinterestrate DemandCurve AninvestmenttaxcreditincreasesthedemandforL F whichraisestheeq minterestrateandincreasestheeq minterestrateandincreasestheeq mquantityofL F Anincreaseintheinterestratemakessavingmoreattractive whichincreasesthequantityofloanablefundssupplied Thedemandforloanablefundscomesfrominvestment a Firmsborrowthefundstheyneedtopayfornewequipment factories etc Chapter13Savings Investment FinancialSystemb Householdsborrowthefundstheyneedtopurchasenewhouses
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