lec-12a - revision- saving, investment, and the financial system.ppt

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
The Financial System
institutions that help to match one
person’s saving with another person’s
investment.
resources from savers to borrowers.

Financial Institutions
financial institutions that coordinate the
actions of savers and borrowers.
Financial institutions can be grouped
into two different categories: financial
markets and financial intermediaries.


provide funds to borrowers.
Financial intermediaries are financial

The Bond ar!et

Characteristics o" a Bond
matures.
borrower will fail to pay some of the
interest or principal.
laws treat the interest on the bond.
Municipal bonds are federal ta$ e$empt.

Stock represents ownership in a firm and
is therefore% a claim to the profits that the
firm makes.
e&uity financing .
risk and potentially higher returns.
The Stoc! ar!et

The Stoc! ar!et
the 'nited States are the (ew )ork
Stock *$change% the !merican Stock
*$change% and (!S+!,.

The Stoc! ar!et
following information:
-rice1earnings ratio

Financial Intermediaries#
want to save and use the deposits to make
loans to people who want to borrow.
anks pay depositors interest on their
deposits and charge borrowers slightly
higher interest on their loans.

Ban!s
their deposits.
transactions.
and services.

Financial Intermediaries#
utual Funds
shares to the public and uses the proceeds
to buy a selection% or portfolio% of various
types of stocks% bonds% or both.
They allow people with small amounts of
money to easily diversify.

$ther Financial Institutions

Saving and Investment in the %ational
Income &ccounts
in an economy and total e$penditure
on the economy’s output of goods and
services:

Some Important Identities
does not engage in international trade:
Y = C + I + G

the e&uation:
Y – C – G =I The left side of the e&uation is the total
income in the economy after paying for
consumption and government purchases
saving (S).

can be written as:

S = I

'rivate Saving
that households have left after paying
their ta$es and paying for their
consumption.

'u(lic Saving
revenue that the government has left
after paying for its spending.
Public saving = (T – G)

Surplus and )e"icit
surplus because it receives more money
than it spends.
saving.
deficit because it spends more money
than it receives in ta$ revenue.

Saving and Investment
must be e&ual to investment.
S = I

The ar!et "or *oana(le Funds
Financial markets coordinate the
in the market for loanable funds.

The ar!et "or *oana(le Funds
2oanable funds refers to all income
that people have chosen to save and
lend out% rather than use for their
own consumption.

The supply of loanable funds comes from
people who have e$tra income they want
to save and lend out.
The demand for loanable funds comes
from households and firms that wish to
borrow to make investments.
Funds

The interest rate is the price of the loan.
It represents the amount that borrowers
pay for loans and the amount that lenders
receive on their saving.
Supply and )emand "or *oana(le
Funds

Supply and )emand "or *oana(le
Funds
Financial markets work much like
other markets in the economy. The e&uilibrium of the supply and demand
for loanable funds determines the real
interest rate.

Loanable Funds (in billions of
0

+overnment 'olicies That &""ect

Taes and Saving
reduce the future payoff from current
saving and% as a result% reduce the
incentive to save.

Taes and Saving
households to save at any given interest
rate.
the right.
increases.
S
1. Tax incentives for saving increase the supply of loanable funds...
&n Increase in the Supply o" *oana(le
Funds...
dollars)
0
#
2. ...which reduces the equilibrium interest rate...

Taes and Saving
greater saving% the result will be
lower interest rates and greater
investment.

Taes and Investment
incentive to borrow.
Shifts the demand curve to the right.
#esults in a higher interest rate and a greater
&uantity saved.

Taes and Investment
investment% the result will be higher
interest rates and greater saving.

*oana(le Funds...
dollars)
0
Demand& "!
"
#

$%&00
3. ...and raises the equilibrium quantity of

+overnment Budget )e"icits and
it receives in ta$ revenues% the short fall
is called the budget deficit.
The accumulation of past budget deficits
is called the government debt .

budget deficit reduces the supply of
loanable funds available to finance
investment by households and firms.
This fall in investment is referred to as
crowding out.
investments.

loanable funds.
Increases the e&uilibrium interest rate.
#educes the e&uilibrium &uantity of loanable
funds.
S
1. A budget decit decreases the supply of loanable funds...
The E""ect o" a +overnment Budget
)e"icit...
0
#


and stimulates investment.

The U.S. +overnment )e(t
-.S. /oernment debt

Summary
financial institutions such as the bond
market% the stock market% banks% and
mutual funds.
some of their income into the hands of
households and firms who want to borrow.

Summary
Financial institutions attempt to match
one person’s saving with another
person’s investment.

Summary
supply and demand for loanable funds.
The supply of loanable funds comes from
households who want to save some of
their income.
from households and firms who want to
borrow for investment.

Summary
public saving.
reduces national saving and the supply of
loanable funds.
crowds out investment% it reduces the
growth of productivity and 3+-.

3raphical
#eview

0
Funds...
S
1. Tax incentives for saving increase the supply of loanable funds...
dollars)
0
#
2. ...which reduces the equilibrium interest rate...

*oana(le Funds...
dollars)
0
Demand& "!
"
#

$%&00
3. ...and raises the equilibrium quantity of

)e"icit...
S
1. A budget decit decreases the supply of loanable funds...
Loanable Funds (in billions of dollars)
0
#

The U.S. +overnment )e(t
-.S. /oernment debt

lec-12a - revision- saving, investment, and the financial system.ppt

Documents