Saving and investment Flashcards
Define saving
- Depositing unspent income in the bank
- Buying a bond or share
Define investment
= The purchase of new capital eg.equiptment or buildings
What is the market for loanable funds?
= A model which explains how financial markets coordinate saving + investment
- Simplified to one market
- “loanable funds” refers to all income that people have chosen to save and lend rather than consume
Where does supply for loanable funds come from?
= People with extra income they want to loan out
- Can be direct (deliberately buying a bond) or indirect (depositing in a savings account in the bank)
- Saving is always the source of supply
Where does demand for loanable funds come from?
= Households + firms who wish to borrow to make investments
- May be taking out a mortgage or borrowing to buy new equipment
What are interest rates?
= The price of a loan
- Amount borrowers pay for loan and the amount lenders receive
- High interest rates increase supply but decrease demand which then decreases IR again
What would happen if gov’t introduced saving incentives?
Eg. consumption tax
- The supply of loanable funds curve would shift outwards
- Interest rates would decrease and investment would increase
What would happen if gov’t introduced investment incentives?
Eg. Investment tax credit
- Demand curve would shift outwards
- Interest rates would increase and supply would increase
Gov’t budget deficit effect on saving and investment
- Does not affect demand
- Supply curve would shift inwards as the government will be using some of the funds
- Supply decreasing pushes interest rates up and demand down
- This is known as crowding out and reduces LR growth rates
Gov’t budget surplus effect on saving and investment
- Gov’t repays debt
- This contributes to national saving, interest rates decrease and investment increases = growth
