ECON MIDTERM 2 - Savings = Investment consumer savings...

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Savings = Investment, consumer savings disposable income= C + Sprivate Sprivate=N+TR-T-C Government savings- Sgov=T-Tr-G. surplus>0 T>Tr+G, deficit ,<0 T< Tr+G . Capital flows (KI), IN- + funds moving world to domestic foreigners savings use domestic, OUT + funds moving domestic to world. KI= M-X= savings foreigners, X-M< domestic borrows from world, X-M>0 world borrows. market for loanable funds one asset, price = interest rate (r,i) given as % so size doesn’t matter, lenders choose how much to save given I, borrowers choose how much to borrow given I, outcome efficient. Rate of Return (profit earned by firm on investment as % of expenditure) > cost of loan, RR= (marginal revenue from investment – cost of investment)/cost of investment x 100, if RR>r then firm demands funds RR<I t hen borrow 0. Demand downward sloping- I high only firms with large RRs satisfy borrowers wants low#, as i deceases more firms have RR such that RR>i so more firms borrow # of loans increases. Supply PV of future income> PV of present consumption then will supply S<B(1+r)S B- consumer impatience. Tina has $1 to spend or save i=20%, B=.8 .8(1+.2).1= .96 <1 so tina spends, lowest interest rate to save .8(1+i).1=1 i=25%. upward sloping consumers differ in impatience i is low only most patient will save as i increases more people satisfy so more save. CE denoted by r* q* always in CE since S=I . Government- budget= T-TR-G <0 (deficit) people want G and TR high T low, crowding out by decreas quantity of private loanable funds available inefficient allocation funds, Consumption tax/reducing capital tax lowers opportunity cost saving, (1-t)S<S<B(1+i)S inefficient growth too fast, optimal tax zero. Financial system - different i+ time horizons types assets. Financial asset ( loan stock bond bank deposit) Physical asset (pre-existing house factory painting) Liability-, lender asset borrower liability assets= liabilities Role of financial system - reduces transaction costs (expense of negotiating and executing a trade) , liquidity (gives cash to those who need it), reducing risk( uncertainty future outcomes involves cost and benefits opportunity to diversify). Types of financial assets - loan- agreement to lend funds now in exchange for funds +interest later individually tailored high transactions costs illiquid asset, bonds- firm or gove traded in market+ quality rated by independent
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ECON MIDTERM 2 - Savings = Investment consumer savings...

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