Principles of Economics- Mankiw (5th) 557

Principles of Economics- Mankiw (5th) 557 - CHAPTER 25 S AV...

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CHAPTER 25 SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 575 In many ways, financial markets are like other markets in the economy. The price of loanable funds—the interest rate—is governed by the forces of supply and demand, just as other prices in the economy are. And we can analyze shifts in sup- ply or demand in financial markets as we do in other markets. One of the Ten Prin- ciples of Economics introduced in Chapter 1 is that markets are usually a good way to organize economic activity. This principle applies to financial markets as well. When financial markets bring the supply and demand for loanable funds into bal- ance, they help allocate the economy’s scarce resources to their most efficient use. In one way, however, financial markets are special. Financial markets, unlike most other markets, serve the important role of linking the present and the future. Those who supply loanable funds—savers—do so because they want to convert some of their current income into future purchasing power. Those who demand
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