Finishing lecture 6 and starting lecture 7 Flashcards
Define investment
spending on new capital equipment, inventories and structures (including household purchases of new housing)
How can you fund investment?
- from past savings
- from other sources such as borrowing with promise to pay back plus a return or obtain funds in return for a share of future profits
What are savings?
economy wide disposable income minus consumption purchases
What does the financial system consist of?
those institutions in an economy that help match one person’s savings with another person’s investment
What are borrowers?
they demand funds withe the knowledge that they will have to pay it back with interest or other return
What are savers?
they supply funds to the financial system with the expectations that they will get back their savings with interest or other return
What is a closed economy?
an economy that does not interact with the rest of the world
In a closed economy, economy-wide investment equals what?
economy-wide savings
In an open economy, investment can be to a greater or lesser part b funded by what?
savings from overseas
Financial institutions can be grouped into what two broad classifications?
financial markets and financial intermediataries
Define financial market
institutions through which savers can directly provide funds to borrowers
Define financial intermediaries
institutions through which savers can indirectly provide funds to savers (eg. banks)
What are two examples of financial markets? What do these finance?
share markets and bond markets
What is a bond?
a paper promise to pay back with rate of return on it (you can sell it to someone else)
