CH 7 - Chapter 7: Finance, Saving, and Investment I....

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Chapter 7: Finance, Saving, and Investment I. Financial Institutions & Markets a. Finance & Money i. Finance-activity of providing funds that finance expenditures on capital, study how its obtained/used financial resources and how they cope with risks ii. Money-use to pay for goods/services/factors of production/financial statements, study how they use it , how much of it they hold, how banks create/mange and how it influences economy b. Physical Capital and Financial Capital i. Physical capital-tools, instruments, machines, buildings, & other items that were produced in the past and used today to make goods/services ii. Financial capital-funds firms use to buy physical capital iii. Increase in quantity of capital increase production possibilities & shifts aggregate production fcn upward i. Quantity of capital changes bc of investment and depreciation ii. Investment increases quantity of capital iii. Depreciation decreases quantity of capital iv. Gross investment-ttl amt spent on new capital v. Net investment-change in value of caital 1. = gross investment – depreciation d. Wealth & Savings i. Wealth-value of all things ppl own
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ii. Saving-amt of income that is not paid in taxes or spent on consumption goods/services iii. Capital gains-wealth increase when market value of assets rises iv. Capital losses-wealth decreases when market value of assets falls v. Wealth of nation @ end of year = its wealth at start of year + saving during year, which equals income minus consumption expenditure e. Markets for Financial Capital i. Loan Markets 1. Short-term finance to buy inventories or extend credit to customers firms get loan from a bank 2. Households purchase big ticket items take out a loan in form of outstanding credit card balances 3. Mortgage-legal contract that gives ownership of a home to lender in event that borrower fails to meet agreed loan payments a. Funds usually obtained as loan that is secured by mortgage ii. Bond Markets 1. Bond-promise to make specified payments on specified dates, buyer of bond makes loan to company and is entitled to payments promised by bond 2. Bond market-bonds issued by firms and governments are traded here 3. Mortgage-backed security-entitles holder to income from package of mortgages
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a. Entitled to receive payment that comes from payments received by mortgage lender from home-buyer-borrower iii. Stock Markets 1. Stock-certificate of ownership and claim to firm’s profits 2. Stock market-financial market where shares of stocks of corp. are traded f. Financial Institutions i. A firm that operates on both sides of markets for financial capital (borrower in one market and lender in another)
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This note was uploaded on 11/14/2011 for the course ECO 202 taught by Professor Normmiller during the Spring '08 term at Miami University.

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CH 7 - Chapter 7: Finance, Saving, and Investment I....

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