Chapter 26 Savings & Investment Spending Flashcards
What is the savings-investment spending identity?
Total income =Total spending
within an economy that has no government or foreign trade
In a simplified economy (no govt. or foreign trade):
Total income = ?
Consumption spending + Savings
In a simplified economy (no govt. or foreign trade):
Total spending = ?
Consumption spending + Investment spending
What is the definition of a budget surplus?
If the government collects more tax revenue than it spends. This is equivalent to govt. savings.
What is a budget deficit?
A negative budget surplus
National savings - private savings = ?
National savings - private savings = Budget balance
How is private savings calculated?
Ps = Yd - C
Private savings = Disposable income - Consumption
What is Capital Inflows? (KI)
Im - Ex
Imports minus exports
Why is capital inflow investment spending worse than national savings investment spending?
Because all invested sums are paid back with interest. When those sums come from somewhere else, more money leaves the country once everyone is paid back.
In an economy with foreign trade, how can investment spending be determined?
Investment spending = National savings + Capital inflow
I = Sn + KI
What factors cause a shift in the demand curve for loanable funds?
Changes in perceived business opportunities
Changes in govt. borrowing
What factors cause a shift in the supply curve of loanable funds?
Changes in private savings behavior
Changes in Capital inflows
What shifts both the supply and demand in the market for loanable funds?
Expectations of future inflation.
What is the principle that states, “an increase in expected inflation drives up the nominal interest rate, leaving the real interest rate unchanged.”
The Fisher effect
What are the 3 tasks of the financial system?
Reducing transaction costs
Reducing risk
Providing liquidity
