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1、Saving, Investment, andthe Financial System,13,Financial Institutions in the U.S. Economy,Financial systemGroup of institutions in the economyThat help match One persons saving With another persons investmentFinancial marketsFinancial institutionsSavers can directly provide funds to borrowers,2,Fina
2、ncial Institutions in the U.S. Economy,Financial marketsThe bond market BondCertificate of indebtedness Time of maturity - at which the loan will be repaidRate of interestPrincipal - amount borrowedTerm - length of time until maturityCredit riskTax treatment,3,Financial Institutions in the U.S. Econ
3、omy,Financial marketsThe stock market StockClaim to partial ownership in a firm Organized stock exchangesStock prices: demand and supplyEquity financeSale of stock to raise moneyStock indexAverage of a group of stock prices,4,Financial Institutions in the U.S. Economy,Financial intermediariesFinanci
4、al institutionsSavers can indirectly provide funds to borrowersBanksTake in deposits from saversBanks pay interestMake loans to borrowersBanks charge interestFacilitate purchasing of goods and servicesChecks medium of exchange,5,Financial Institutions in the U.S. Economy,Financial intermediariesMutu
5、al fundsInstitution that sells shares to the publicUses the proceeds to buy a portfolio of stocks and bondsAdvantagesDiversificationAccess to professional money managers,6,Saving & Investment in National Income Accounts,Some important identitiesGross domestic product (GDP)Total incomeTotal expenditu
6、re Y = C + I + G + NXY= gross domestic product GDPC = consumptionG = government purchasesNX = net exports,7,Saving & Investment in National Income Accounts,Some important identitiesClosed economyDoesnt interact with other economiesNX = 0Open economyInteract with other economiesNX 0,8,Saving & Invest
7、ment in National Income Accounts,Some important identitiesAssumption: close economy: NX = 0Y = C + I + GNational saving (saving), STotal income in the economy that remains after paying for consumption and government purchasesY C G = I; S = Y C - GS = I,9,Saving & Investment in National Income Accoun
8、ts,Some important identitiesT = taxes minus transfer paymentsS = Y C GS = (Y T C) + (T G)Private saving, Y T CIncome that households have left after paying for taxes and consumptionPublic saving, T G Tax revenue that the government has left after paying for its spending,10,Saving & Investment in Nat
9、ional Income Accounts,Some important identitiesBudget surplus: T G 0Excess of tax revenue over government spendingBudget deficit: T G 0Shortfall of tax revenue from government spending,11,Saving & Investment in National Income Accounts,The meaning of Saving and Investing S = I Saving = InvestmentFor
10、 the economy as a wholeOne persons savings can finance another persons investment,12,The Market for Loanable Funds,Market for loanable fundsMarketThose who want to save supply fundsThose who want to borrow to invest demand fundsOne interest rateReturn to savingCost of borrowingAssumptionSingle finan
11、cial market,13,The Market for Loanable Funds,Supply and demand of loanable fundsSource of the supply of loanable fundsSavingSource of the demand for loanable fundsInvestment Price of a loan = real interest rateBorrowers pay for a loanLenders receive on their saving,14,The Market for Loanable Funds,S
12、upply and demand of loanable fundsAs interest rate risesQuantity demanded declinesQuantity supplied increasesDemand curveSlopes downwardSupply curveSlopes upward,15,The market for loanable funds,1,16,Supply,Demand,5%,$1,200,The interest rate in the economy adjusts to balance the supply and demand fo
13、r loanable funds. The supply of loanable funds comes from national saving, including both private saving and public saving. The demand for loanable funds comes from firms and households that want to borrow for purposes of investment. Here the equilibrium interest rate is 5 percent, and $1,200 billio
14、n of loanable funds are supplied and demanded.,The Market for Loanable Funds,Policy 1: saving incentivesShelter some saving from taxationAffect supply of loanable fundsIncrease in supplySupply curve shifts rightNew equilibriumLower interest rateHigher quantity of loanable fundsGreater investment,17,
15、Saving incentives increase the supply of loanable funds,2,18,Supply, S1,Demand,5%,$1,200,A change in the tax laws to encourage Americans to save more would shift the supply of loanable funds to the right from S1 to S2. As a result, the equilibrium interest rate would fall, and the lower interest rat
16、e would stimulate investment. Here the equilibrium interest rate falls from 5 percent to 4 percent, and the equilibrium quantity of loanable funds saved and invested rises from $1,200 billion to $1,600 billion.,S2,4%,$1,600,1. Tax incentives for saving increase the supply of loanable funds . . .,3. . . . and raises the equilibrium quantity of loanable funds.,
