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!!!!!
