chapter 18 - 18 Saving,Investment,andthe...

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Saving, Investment, and the  Saving, Investment, and the  Financial System Financial System E conomics E S S E N T I A L S O F E S S E N T I A L S O F N. Gregory Mankiw N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich 18
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In this chapter,  In this chapter,  look for the answers to these questions: look for the answers to these questions: What are the main types of financial institutions in the U.S. economy, and what is their function? What are the three kinds of saving? What’s the difference between saving and investment? How does the financial system coordinate saving and investment? How do govt policies affect saving, investment, and the interest rate? 2
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SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 3 Financial Institutions The financial system : the group of institutions that helps match the saving of one person with the investment of another. Financial markets : institutions through which savers can directly provide funds to borrowers. Examples: The Bond Market. A bond is a certificate of indebtedness. The Stock Market. A stock is a claim to partial ownership in a firm.
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SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 4 Financial Institutions Financial intermediaries : institutions through which savers can indirectly provide funds to borrowers. Examples: Banks Mutual funds institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds
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SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 5 Different Kinds of Saving Private saving = The portion of households’ income that is not used for consumption or paying taxes = Y T C Public saving = Tax revenue less government spending = T G
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SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 6 National Saving National saving = private saving + public saving = ( Y T C ) + ( T G ) = Y C G = the portion of national income that is not used for consumption or government purchases
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SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 7 Saving and Investment Recall the national income accounting identity: Y = C + I + G + NX For the rest of this chapter, focus on the closed economy case: Y = C + I + G Solve for I : I = Y C G = ( Y T C ) + ( T G ) Saving = investment in a closed economy national saving
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SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 8 Budget Deficits and Surpluses Budget surplus = an excess of tax revenue over govt spending = T G = public saving Budget deficit = a shortfall of tax revenue from govt spending = G T = – (public saving)
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Suppose GDP equals $10 trillion, consumption equals $6.5 trillion, the government spends $2 trillion and has a budget deficit of $300 billion. Find public saving, taxes, private saving,
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chapter 18 - 18 Saving,Investment,andthe...

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