Ch8 - Chapter 8: Savings and Investment Note: You will not...

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Chapter 8: Savings and Investment Note: You will not be tested on formulas related to stocks and bonds on pages 61 and 63 of the Workbook. But you are expected to know the equations on pages 51 and 52. I suggest you understand the meaning of private savings, public saving and national savings. Then, writing the equations flows quite naturally. The purpose of Chapter 8 is to show how saving and investment are coordinated by the loanable funds market. Within the framework of the loanable funds market, we are able to see the effects of taxes and government deficits on saving, investment, the accumulation of capital, and ultimately, the growth rate of output. By the end of this chapter, students should understand: some of the important financial institutions in the U.S. economy. how the financial system is related to key macroeconomic variables. the model of the supply and demand for loanable funds in financial markets. how to use the loanable-funds model to analyze various government policies. how government budget deficits affect the U.S. economy. 1. What is the loanable funds market? The loanable funds market is just a theoretical construct. You cannot go to the “Yellow Pages” and look under “Loanable Funds Markets”; no such markets exist. Economists use the term “loanable funds market” to describe the aggregate markets through funds flow from savers to lenders. Which interest rate is the price of loanable funds? Interest rates in the economy do vary because of depending on characteristics of the financial asset such as the term, risk, and tax treatment, but all interest rates tend to move together when changes in the loanable funds market occur. Thus, it is appropriate to talk of one interest rate. In the text, the interest rate refers to
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This note was uploaded on 05/10/2010 for the course ECON 220 taught by Professor Ramoo during the Spring '10 term at Diablo Valley College.

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Ch8 - Chapter 8: Savings and Investment Note: You will not...

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