Saving, Investment, and the financial system Flashcards
Financial system
Group of institutions in the economy that help to match one person’s saving with another person’s investment. Either financial market or financial intermediaries
Financial Markets
Financial institutions through which savers can directly provide funds to borrowers. ie bond market and stock market
Financial Intermediaries
Financial institutions through which savers can indirectly provide funds to borrowers. “institutions that stand between savers and borrowers” ie banks and mutual funds
medium of exchange
an item that people can easily use to engage in transactions. ie checks via banks.
Key numbers for stock watchers
price, dividend, and price-earnings ratio.
a high price earnings ratio
price of a corporation’s stock divided by the amount of the corporation earned per share over the past year.
High P/E ratio indicates the corporation’s stock is expensive relative to its recent earnings–either that people expect earnings to rise in future or that stock is overvalued.
Mutual Funds
an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds.
They allow people with small amounts of money to diversity their holdings.
For this service, the company operating the mutual fund charges shareholders a fee, usually between .5 and 2% of assets each year.
GDP formula
y=C+I+G+NX
Closed vs open economies
interact or don’t interact with the world
national saving
the total income in the economy that remains after paying for consumption and government purchases
Public Saving + Private Saving
Y-C-NT+NT-G=Y-C-G
closed economy formula
y=C+I+G
private saving
income that households have left after paying for taxes and consumption
PrS=Y-C-NT
Public saving
tax revenue that the government has left after paying for its spending
PubS=NT-G
budget surplus
excess of tax revenue over government spending
Economics–difference between saving and investment
investment refers to the purchase of new capital, like equipment or buildings
(I-PrS)+(G-NT)+(X-M)=
0
Disposable income
C + PrS
AE
=GDP
3 ways to distribute income
Consumption spending, saving (PrS), and Taxes (NT = Taxes - transfers out).
Market for loanable funds
market in which those who want to save supply funds to those who want to borrow to invest demand funds
Loanable funds
all income that people have chosen to save and lend out, rather than use for their own consumption and to the amount that investors have chosen to borrow to fund new investment projects
Source of the supply of loanable funds
saving
Source of the demand for loanable fudns
investing
Effect of a government deficit on the Market for loanable funds
Shift supply to the left and raises supply, raising the interest rate p565
Effect of tax credits for investing
increases demand and increases interest rate.
Effect of savings being tax-free
lower interest rates by shifting supply to the right
If a reform of the tax laws encouraged greater saving…
the result would be lower interest rates and greater investment
If a reform of the tax laws encouraged greater investment…
the result would be higher interest rates and greater saving.
How d governments finance budget deficits
borrowing in bond market
Crowding out
decrease in investment that results from government borrowing.
Compounding
the accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future.
