saving, investment, and the financial system chapter 25
TRANSCRIPT
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SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM
Chapter 25
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The Financial System
• The financial system moves money from savers to borrowers.
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Types of Financial Institutions
• Financial Markets - savers directly provide funds to borrowers
Stock MarketBond Market
• Financial Intermediaries - savers indirectly provide funds to borrowers
BanksMutual Funds
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Financial Markets: The Bond Market
• A bond is a certificate of indebtedness
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Characteristics of a Bond
• Term: The length of time until maturity.
• Credit Risk: The probability of repayment.
• Tax Treatment: How tax laws treat the interest on the bond.
Municipal bonds are federal tax exempt.
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• Stock is a claim to partial ownership in a firm.
• Selling stock to raise money is called equity financing.
Financial Markets: The Stock Market
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Financial Intermediaries:Banks
• Banks are middlemen between savers and borrowers.
• Mutual fund - for small investors
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Other Financial Institutions
• Credit unions
• Pension funds
• Insurance companies
• Loan sharks
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Saving and Investment in the National Income Accounts
• Recall that GDP is:
Y = C + I + G + NX
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Some Important Identities
• Assume a closed economy:
Y = C + I + G
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Saving and Investment
• For the economy as a whole, saving must be equal to investment.
S = I
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Public Saving
• Public saving - tax revenue minus government spending.
Public saving = (T – G)
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• The supply of loanable funds comes from savers.
• The demand for loanable funds comes from borrowers.
Supply and Demand for Loanable Funds
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Supply and Demand for Loanable Funds
• The equilibrium of the supply and demand for loanable funds determines the real interest rate.
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Taxes and Saving
• Taxes on savings reduce the incentive to save.
• The supply of loanable funds curve shifts to the left.
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Taxes and Saving
• A tax decrease increases the incentive to save.
The supply of loanable funds curve shifts
to the right.
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Government Policies That Affect Saving and Investment
• An investment tax credit increases the incentive to borrow.
Increases the demand for loanable funds.
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Government Policies That Affect Saving and Investment
• When the government spends more than it receives in tax revenues, the short fall is called the budget deficit.
• The accumulation of past budget deficits is called the government debt.
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Government Policies That Affect Saving and Investment
• Government borrowing reduces the supply of loanable funds available to finance investment by households and firms.
This deficit borrowing crowds out private
borrowers who are trying to finance investments.
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Government Policies That Affect Saving and Investment
• A budget deficit decreases the supply of loanable funds.
Shifts the supply curve to the left.
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Conclusion
• Financial markets are like other markets in the economy.
The real interest rate—the price in the loanable funds market—is governed
by the forces of supply and demand.
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Conclusion
• Financial markets coordinate borrowing and lending, helping to allocate the economy’s scarce resources efficiently.
• The U.S. financial system includes financial institutions such as the bond market, the stock market, banks, and mutual funds.
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Conclusion
• A government budget deficit reducing the supply of loanable funds.
• It crowds out investment and reduces growth and GDP.