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Unformatted text preview: EC 151 Ch: 13 Saving, Investment and the Financial System
Financial institutions in the U.S. economy Saving and investment in the national income accounts The market for loanable funds Financial System Financial system Examine how the financial system works the group of institutions in the economy that help to match one person's saving with another person's investment look at large variety of institutions that make up the financial system in our economy look at the relationship between the financial system and some key macroeconomic variables develop a model of supply and demand for funds in financial market notably savings and investment Financial institutions in the U.S. Economy Financial markets Financial intermediaries The bond market Banks debt finance bond term perpetuity credit risk default junk bonds investment grade tax treatment municipal bonds take deposits from people who want to save, and use them to make loans to people who want to borrow medium of exchange Financial institutions in the U.S. Economy Financial markets The stock market Financial intermediaries equity finance stock Mutual Fund Portfolio higher risk and higher return than bond stock exchanges stock index store of value bonds stocks both Other financial institutions Pension funds Credit unions Insurance companies All serve the same goal: directing the resources of savers into the hands of borrowers Some important identities Saving and Investment in the national income accounts
GDP = Y assume closed economy Y= C + I + G + NX Y = C + I + G Y C G = I = national savings (savings) S = I S = Y C G S = (Y T C) + (T G) Savings vs. Investment (Y T C) = private saving (T G) = public saving T > G = budget surplus T < G = budget deficit The market for loanable funds A market in which those who want to save supply funds and those who want to borrow to invest demand funds saving is the source of the supply of loanable funds investment is the source of demand for loanable funds The P of a loan is IR (real IR) S & D for loanable funds Country's standard of living depends on its ability to produce goods and services Savings are important LR determinant of a nation's productivity people respond to incentives Policy 1: saving incentives Policy 2: investment incentives reform to tax code Tax credit Policy 3: Government budget deficits and surpluses Crowding out US government debt Case study: The history of U.S. government debt fiscal vs. monetary policy debtGDP ratio Additional information www.investopedia.com http://online.wsj.com/public/us www.nyse.com www.nasdaq.com www2.standardandpoors.com http://www.uwsa.com/uwsausdebt.html http://www.brillig.com/debt_clock/ http://www.toptips.com/debtclock.html ...
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