Macro_Notes2

Macro_Notes2 - Lecture Notes 2 Principles of Macroeconomics Chapter 8 Savings Investment and the Financial System-The financial system channels

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture Notes 2 Principles of Macroeconomics Chapter 8 – Savings, Investment, and the Financial System -The financial system channels funds from savers to investors . Savers (Also referred to as financial investment .) **Savers’ income exceeds their expenditures lend money. -Buy bonds -Put money in the bank -Buy stock -Buy mutual fund shares… Savers: save for retirement; save for a rainy day; save for a new car… Investors **Investors borrow money to purchase new physical capital . -Sell bonds -Borrow from the bank -Sell stock… Investors: are entrepreneurs starting a new business; are companies expanding (pizza shop building a new kitchen), etc. ***The efficient functioning of the financial system to efficiently channel financial capital from savers to investors is crucial for long-run economic growth Diagram of the Financial System:
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Deskins, Lecture Notes 2 2 1. Financial Markets A) Bond Market -Referred to as debt finance. -A bond is a certificate of indebtedness. -Bonds can vary in time to maturity: few months…30 years. -Types of bonds: coupon bond, discount bond, fixed-payment bond -Bonds vary in risk: Default Risk – *Higher risk higher interest rate Bond Ratings: S&P (For long-term bonds) (also see Moody’s and Fitch) AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+… Consider an example of a Coupon Bond: Face Value = $1,000; coupon rate = 10%; time to maturity = 2 years; interest paid annually. 1. Purchase the bond at face value, Jan. 1, 2008. 2. Interest payment of 0.1*1,000, Jan. 1, 2009. 3. Interest payment of 0.1*1,000 + payment of 1,000 (FV), Jan.1, 2010 ____________________________________________________________ Suppose you sell the bond just after the interest payment was made on Jan. 1, 2009:
Background image of page 2
Deskins, Lecture Notes 2 3 B) Stock Market -Equity Finance -A stock is a claim to partial ownership in a firm. -The benefit of stock is the dividends it pays (and capital gains). Stock indexes: Dow Jones Industrial Average, NASDAQ, S&P 500; Russell 2000… *Efficient Market Hypothesis: In the long-run, stock prices reflect the discounted present value of all expected future dividends. *Changes in stock indexes can signal future economic growth. The Dow, S&P 500, etc. are key leading indicators of future economic activity. Notes on DJIA over past 20 years : 2. Financial Intermediaries *Play the largest role in the channeling of funds b/w savers and investors. -Banks (commercial v. investment) -Mutual Funds (indexed funds, managed funds) -See www.vanguard.com www.troweprice.com www.americanfunds.com -Insurance Companies Why Financial Intermediation? 1. Transactions Costs 2. Risk 3. Asymmetric Information -adverse selection -moral hazard
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Deskins, Lecture Notes 2 4 Savings, Investment, and National Income Accounts Recall, Y = C+I+G (closed economy) Rearrange, Y-C-G = national saving = I, or S=I Alternatively, S = (Y-T-C) + (T-G) where T=Taxes Y-T-C – Private Saving T-G – Public Saving What Coordinates Savings and Investment? *We develop an analytical framework to help us understand changes in the quantity of
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/27/2011 for the course ECON 205 taught by Professor Johndeskins, during the Fall '11 term at Creighton.

Page1 / 18

Macro_Notes2 - Lecture Notes 2 Principles of Macroeconomics Chapter 8 Savings Investment and the Financial System-The financial system channels

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online