Topic 7_ Saving Investment and the Financial System

Question 1

If savings must ALWAYS equal investment, how does the financial system co-ordinate savings and investment?

Answer 1

we model this as the market for loanable funds

Question 2

market for loanable funds

Answer 2

is where the borrowers of loanable funds create DEMAND

the lenders of loanable funds create SUPPLY

AND THE PRICE IS THE MARKET INTEREST RATE

Question 3

Assumptions for loanable funds market model

Answer 3

only one financial market,
all savers deposit savings
all borrowers borrow
one interest rate= cost of saving and borrowing
interactions only domestic

Question 4

price in the market for loanable funds

Answer 4

IS EQUAL TO BOTH THE SAVINGS RATE AND BORROWN RATE

Question 5

Private savings formula

Answer 5

GDP(Y)-C-T+TR

Question 6

Public savings formula

Answer 6

T-G-TR

Question 7

How do hosueholds provide private savings
-indirectly
-driectly

Answer 7

they supply loanable funds directly to market (Stock and bonds) or indirectly (bank or mtf)

Question 8

What happens if public savings is positive

Answer 8

T>G+TR ADDS TO TOTAL SAVING AND SUPPLY OF LOANABLE FUNDS

Question 9

What happens if public savings is negative

Answer 9

T<G+TR reduces total savings and supply of loanable funds

Question 10

What shifts the supply of loanable funds

Answer 10

policies that affect PRIVATE SAVING
policies that affect PUBLIC SAVINGS

Question 11

who creates the demand for loanable ufnds

Answer 11

housheolds and firms who need money

Question 12

why is the demand for loanable funds decreasing

Answer 12

bc as interest rate increases people wanna browwo less

Question 13

what effects the demand for loanable funds curve

Answer 13

poolicies that affect investmetn

Question 14

what happens at market equilibrium

Answer 14

Supply = Demand
Savings=Investmetn!

Question 15

WHAT DEOS SUPPLY REPRESENT

Answer 15

SAVINGS

Question 16

WHAT DOES DEMAND REPSORESETN

Answer 16

INVESTMENT

Question 17

what does a govt deficit do

Answer 17

the govt borrows to finances its deficit, leaves less funds abiable for investmetn

THIS IS CALLED THE CROWDING OUT EFFECT

Question 18

CROWDING OUT EFFECT OF BUDGET DEFICIT

Answer 18

Govt competes w priv sector for funds, resulting in higher in rates and a reduction is prviate invesmtet

Question 19

which curve does a govt deficit affect

Answer 19

the supply of loanable funds bc less funds to loan when govt gets first grabs at savings

Question 20

what is IMPORTANT FOR LONG RUN ECON GRWOTH

Answer 20

INVESTMENT

Question 21

X AXIS Y AXIS

Answer 21

pRICE of loanable funds (real int rate)

q of loanable funds

Question 22

SPENDING ON INVENTORY IS WHAT

Answer 22

A TYPE OF INVESTMENT

Question 23

GOVERNEMNT SPEDNING FORMULA

Answer 23

Y= C + I+G

Question 24

what does the supply curve mean

Answer 24

SAVINGS (public savings and private saving)

Question 25

What does demand curve mean

Answer 25

INVETSEMTN(spending on non residential/residential and inventory)

Question 26

if govt is running a budget deficit, how does it impact the supply demand curved

Answer 26

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

Question 27

why is gift deficit bad

Answer 27

crowds out private sector investment because the govt can issue higher interest bonds and private sector can’t compete