Lec07handout

Lec07handout - Saving, Investment, and the Financial System...

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Saving, Investment, and the Financial System Slide #07 July 14 2010 1 Intro Macro
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Financial Institutions in the U.S. Economy Financial system Group of institutions in the economy That help match One person’s saving With another person’s investment Financial markets Financial institutions Savers can directly provide funds to borrowers 2 Intro Macro
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Financial Institutions in the U.S. Economy Financial markets The bond market Bond Certificate of indebtedness Time of maturity - at which the loan will be repaid Rate of interest Principal - amount borrowed Term - length of time until maturity Credit risk Tax treatment 3 Intro Macro
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Financial Institutions in the U.S. Economy Financial markets The stock market Stock Claim to partial ownership in a firm Organized stock exchanges Stock prices: demand and supply Equity finance Sale of stock to raise money Stock index Average of a group of stock prices 4 Intro Macro
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Financial Institutions in the U.S. Economy Financial intermediaries Financial institutions Savers can indirectly provide funds to borrowers Banks Take in deposits from savers Banks pay interest Make loans to borrowers Banks charge interest Facilitate purchasing of goods and services Checks medium of exchange 5 Intro Macro
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Financial Institutions in the U.S. Economy Financial intermediaries Mutual funds Institution that sells shares to the public Uses the proceeds to buy a portfolio of stocks and bonds Advantages Diversification Access to professional money managers 6 Intro Macro
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Some important identities Gross domestic product (GDP) Total income Total expenditure Y = C + I + G + NX Y= gross domestic product GDP C = consumption G = government purchases NX = net exports 7 Intro Macro
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Some important identities Closed economy Doesn’t interact with other economies NX = 0 Open economy Interact with other economies NX ≠ 0 8 Intro Macro
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Some important identities Assumption: close economy: NX = 0 Y = C + I + G National saving (saving), S Total income in the economy that remains after
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Lec07handout - Saving, Investment, and the Financial System...

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