Chapter 10 - Savings, Investment, Spending and the Financial System Flashcards
Savings (Domestic/National Savings same as Domestic Investments) =
Y-C-G
Savings (Private) =
Y-C-(T-TR)
Savings (Public/Government Budget Balance)
T-G-TR
Market for Loanable Funds Supply comes from…
Household saving money for future consumption
Market for Loanable Funds Demand Comes from…
Firms looking to make Investments
As real interest rates rises….
firms are less likely to borrow money and households more likely to save money
Shifts in Demand of Loanable Funds
Perceived changes in business opportunities - a change in beliefs of payoffs for investments increasing or decreasing. ex: technology increasing profitability for new investments.
Changes in Gov. Spending. Deficit shifts to the right equaling higher interest rate leading to crowding out.
Shifts in Supply of Loanable Funds
Changes in Private Behavior
Changes in Net Capital Flows. More inflow increases supply of loanable funds.
Crowding Out
An increase in the Gov. Deficit will reduce private investment spending
The Fisher Effect
changes in expected inflation increase the nominal interest rate
Financial Market
where households invest their wealth to buy financial assets
Financial Assets
paper claim that entitles the buyer to future income form the seller
Physical Assets
tangible objects used to generate future income
Liability
an obligation to pay income in the future
Three Functions of the Financial System
- Reduce Transaction Costs
- Reduce Risk
- Provide Liquidity
Types of Financial Assets
Loans
Bonds
Loan-Backed Securities
Stocks
Loans
Lending agreements between a lender and a borrower
Bonds
an IOU between the borrower and lender where the borrower pays a fixed amount over time plus the principle at the end of a specified time frame
Loan-Backed Securities
assets made by pooling individual loans and selling shares in that pool
Stocks
shares in the ownership of a company
Financial Intermediary
an institution that transforms funds from many individuals into financial assets.
Four Major Financial Intermediaries
Mutual Funds
Pension Funds
Life Insurance Companies
Banks
Mutual Fund
creates a stock portfolio by buying and holding shares in companies and then selling shares of the stock portfolio to individual investors.
Pension Fund
nonprofit institutions that collect the savings of their customers and invest the funds in a variety of assets, providing them with income when they retire
Life Insurance Companies
companies that guarantee a payment to the policyholder’s beneficiaries when the policyholder dies
Banks
Collect Deposits from individuals and use those deposits to provide investment funds to borrowers
Present Value (take into account when investing)
amount at end of period = x(1-r)
Efficient Market Hypothesis
asset prices embody all publicly available information
Random Walk
the movement of stock prices over time in a unpredictable way. Contradicts efficient market hypothesis.
