Topic 7_ Saving Investment and the Financial System Flashcards
If savings must ALWAYS equal investment, how does the financial system co-ordinate savings and investment?
we model this as the market for loanable funds
market for loanable funds
is where the borrowers of loanable funds create DEMAND
the lenders of loanable funds create SUPPLY
AND THE PRICE IS THE MARKET INTEREST RATE
Assumptions for loanable funds market model
only one financial market,
all savers deposit savings
all borrowers borrow
one interest rate= cost of saving and borrowing
interactions only domestic
price in the market for loanable funds
IS EQUAL TO BOTH THE SAVINGS RATE AND BORROWN RATE
Private savings formula
GDP(Y)-C-T+TR
Public savings formula
T-G-TR
How do hosueholds provide private savings
-indirectly
-driectly
they supply loanable funds directly to market (Stock and bonds) or indirectly (bank or mtf)
What happens if public savings is positive
T>G+TR ADDS TO TOTAL SAVING AND SUPPLY OF LOANABLE FUNDS
What happens if public savings is negative
T<G+TR reduces total savings and supply of loanable funds
What shifts the supply of loanable funds
policies that affect PRIVATE SAVING
policies that affect PUBLIC SAVINGS
who creates the demand for loanable ufnds
housheolds and firms who need money
why is the demand for loanable funds decreasing
bc as interest rate increases people wanna browwo less
what effects the demand for loanable funds curve
poolicies that affect investmetn
what happens at market equilibrium
Supply = Demand
Savings=Investmetn!
WHAT DEOS SUPPLY REPRESENT
SAVINGS
WHAT DOES DEMAND REPSORESETN
INVESTMENT
what does a govt deficit do
the govt borrows to finances its deficit, leaves less funds abiable for investmetn
THIS IS CALLED THE CROWDING OUT EFFECT
CROWDING OUT EFFECT OF BUDGET DEFICIT
Govt competes w priv sector for funds, resulting in higher in rates and a reduction is prviate invesmtet
which curve does a govt deficit affect
the supply of loanable funds bc less funds to loan when govt gets first grabs at savings
what is IMPORTANT FOR LONG RUN ECON GRWOTH
INVESTMENT
X AXIS Y AXIS
pRICE of loanable funds (real int rate)
q of loanable funds
SPENDING ON INVENTORY IS WHAT
A TYPE OF INVESTMENT
GOVERNEMNT SPEDNING FORMULA
Y= C + I+G
what does the supply curve mean
SAVINGS (public savings and private saving)
What does demand curve mean
INVETSEMTN(spending on non residential/residential and inventory)
if govt is running a budget deficit, how does it impact the supply demand curved
budget deficit= means no public saving
the /“supply of savings is less bc govt spending is lower
FURTHERMOREE, this is crowding out effect because the savings of total households rather go to govt then the private sector
why is gift deficit bad
crowds out private sector investment because the govt can issue higher interest bonds and private sector can’t compete
