Topic 7_ Saving Investment and the Financial System Flashcards
Financial systems
channels funds from savers to borrowers and vice versa
two financial insitution in economy
Financial Markets
Financial intermediaries
Financial Markets
markets where financial securities such as stock and bonds are bought/sold
firms raise funds by selling financial securities DIRECTLY to savers
Financial security defintion
document stating the terms under which funds go from buyer of security (lender)to the seller (borrower)
2 types of financial markets
stock market
bond market
stock
stock is a financial security that represent you partially owning that firm AND own a SHARE of the firm profits
Firms pay shareholders DIVIDENDS (a part of its profits)
what is a stock
you own a piece of the company, you get paid dividend
if price of stock increases how can you make profit
by selling that stock, this is called
FINANCIAL CAPITAL GAINS
Financial Capital Gains
Financial Capital Loss
Occurs when stock gains value and you sell
occurs when the stock loses value and cant sell
Financial capital is not included in
INVESTMENT
Why dont we use financial capital when we measure gdp?
Because the ownership of financial capital can change at any time
Bond
financial security promising to repay a fixed amount of funds in the future and also an interest rate
this is a LOAN from a household to either govt or a firm
The data of maturity, what happens here?
When the principal or amount borrowed is to be repaid
how long can bond maturity be
couple months or years
what is the most secure bond
govt treasury bill
what is the most secure bond
govt treasury bill
financial intermediaries
firms that borrow funds from savers and lend them to borrowers
EX:
-Banks (Accept deposits from savers and make loans)
-mtf
how do banks mak emoney
they charge a higher interest late on loans they give out, then what they pay to consumers who save in their own bank
bank might pay 2% on savings account, but charge 6% on loans
Mutual Funds
sell shares to savers then use the funds to buy financial securities (a portfolio of stock and bonds)
shareholders who invest in MF take on the risk of losing their money
MF charges 0.5-0.3 of assets fee
3 services for savers and borrowes
Risk Sharing: diversiy portfolio; by allowing savers to spread their money amoong many financial assets, savers can reduce risk
Liquidity: ability to sell their financial asset and convert them into cash
Information: providing savers with facts about borrowers and expectations about reutnrs on financial securities
4 people in financial system
financial markets
savers
financial intermediaries
borrowers
What is the relationship between GDP and components
GDP (Y)= C+I+G+NX
Consumption
Investment
Govt purchases (local /federal/provicnical)
Net Exports
What is investment in a closed economy equal to
Equal to innvestmet+ consuption and govt spending
investment is the purchase of new capital
Y= C +I+G
What dont we incldue in investment
Financial CAPITAL!
Investmenti s the purchase of new capital!!!!!
Private Savings
all household incomes that is not spent
Sprivate= Y +TR-C-T
What you earn +Transfer payment- Consumption-Taxes
Public Savings
Tax revenue- govt purchases-Transfer payments to household
S=T-G- TR
what do households do with private savings
buy bonds or stocks
buy mf share
deposit in saving or checkingP
Assume in a closed economy THERE ARE NO NET EXPORTS
Y= C + I + G
iso for investment
I= Y-C-G
THIS IS THE SAME AS
S= Y- C -G
SOOOOO…
In a clsoed economy total savings = total investment
S=I
When T=G +TR
A balanced pubdget where public savings equals to Zero
tax=govt spending+transfer payments
When T> G + TR
a budget surplus. where public savings is positive
When T< G + TR
a budget deficit, where public savings is negative
How can public saving be negative/ How can there be a budget deficit
when what is collected from taxes is LOWER then what they need
the govt must sell bonds to borrow money needed to fund the spending not paid for with taxes
Why is a budget deficit bad
this makes sthe eocnomy not grow faster, because this DECREASES investments
decreases capital per worker, decrease econ growth
Why is budget surplusgood
promotes investment, promotes growth
do consumers help the economy more by saving the full proceeds of the tax cut or by spending it
savings help the eocnomy in the long run/OR WHEN EXPANSION IS HAPPENING
savings help the eocnomy in a recession!!!!
Investment is always equal to ?
SAVINGS!!! in a closed economy!
what are bonds
waht are stocks
debt
equity
what is a poor functioning financial system
decline in saving and investment
lower eocn growth
lower stand of living
rearrange the closed economy gdp formula
Y = I + G+ C
I=Y-C-G
WHY IS A GOVERNMENT BUDGET DEFICIT BAD
BECAUSE. THIS MEANS THERE IS NEGATIVE PUBLIC SAVINGS, AND THAT THE TOTAL AMOUNT OF SAVING IS LOW
THIS MEANS THAT OCMPANIES THAT BORROW MONEY FROM BANKS ARE UNABELT O DO THAT BECAUSE THERE ARE LESS SAVINGS
Public saving formula
sPUBLIC= Taxes- Govt spending- Transfer Payments
Private Savings formula
Sprive= Y- Consumption+Transfer Payments-Taxes
Taxes formula (in a balanced budget)
Government spending + Transfer payments
