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Chapter 8 - Chapter VIII Saving Investment and the...

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Chapter VIII Saving, Investment, and the Financial System In this chapter, look for the answers to these questions: What are the main types of financial institutions in the Canadian 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 government policies affect saving, investment, and the interest rate? 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. -debt A bond is a certificate of indebtedness. The Stock Market. -ownership A stock is a claim to partial ownership in a firm. *only need to know the definition and difference 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 Saving and Investment in the National Income Accounts Recall that GDP is both total income in an economy and total expenditure on the economy’s output of goods and services: Y = C + I + G + NX In a closed economy: Y = C + I + G Different Kinds of Saving Private saving *people, always positive in this model (assumption) = The portion of households’ income that is not used for consumption or paying taxes = Y T C Public saving *government, can be positive or negative = Tax revenue less government spending = T G 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 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
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Solve for I : I = Y C G = (Y – T – C) + (T – G) (national saving) Saving = investment in a closed economy S = I This expression represents the long-run equilibrium condition in a closed economy. Budget Deficits and Surpluses Budget surplus = an excess of tax revenue over government spending = T G = public saving Budget deficit = a shortfall of tax revenue from government spending = G T = – (public saving) or dissaving
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