Macro Chapter 7 Notes.docx

Macro Chapter 7 Notes.docx - Chapter 7 Financial Markets...

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Chapter 7 Financial Markets and Financial Institutions To study economics of financial institutions and markets we distinguish between: - Finance and money - Physical capital and financial capital Finance and Money Study of finance looks at how households and firms obtain and use financial resources and how they cope with the risks that arise in this activity. The study of money looks at how households and firms use it, how much of it they hold, how banks create and manage it, and how its quantity influences the economy. Physical Capital and Financial Capital Physical capital is the tools, instruments, etc that have been produced in the past and that are used today to produce goods and services. Financial capital are the funds that firms use to buy physical capital. Capital and Investment Gross investment is the total amount spent on purchases of new capital and on replacing depreciated capital. Depreciation is the decrease in the quantity of capital that results from wear and tear and obsolescence. Net investment is the change in the quantity of capital. Net investment = Gross investment – Decpreciation Wealth and Saving Wealth is the value of all the things that people own. Saving is the amount of income that is not paid in taxes or money spent on consumption goods and services. Saving increases wealth. Wealth increases when market value of assets rises -called capital gains- and decreases when market value of assets falls – called capital losses.
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  • Winter '08
  • Noordeh
  • Economics, loanable funds

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