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FINANCE, SAVING, AND INVESTMENT (Financial Markets and Financial…
FINANCE, SAVING, AND INVESTMENT
Financial Markets and Financial Institutions
Finance and money
Physical capital and financial capital
the funds that firms use to buy physical capital capital are called financial capital
Physical capital is the tools, instruments, machines
capital and investment
Depreciation: the decrease in the quantity of capital.
Net investment=Gross investment-Deprecation
Gross investment: total amount spent on purchases of new capital
Wealth and Saving
saving: amount of income not paid in taxes or spent on consumption
wealth: the value of all the things that people own
financial capital markets
bond markets
stock markets
Loan markets
Financial institutions
Trust and Loan companies
credit unions and caisses populaires
Banks
mutual funds
pension funds
insurance companies
insolvency and illiquidity: net worth is total market value it has lent -market value of what is borrowed
positive: institution can remain in business
negative: go out of business
interest rates and asset prices: the interest rate on a financial asset is the interest received expressed as a percentage of the price of the asset.
Funds that finance investment
household saving S
government budget surplus (T-G)
borrowing from the rest of the world(M-X)
the real interest rate
The loanable Funds Market
the demand for loanable funds
the real interest rate
expected profit
the demand for loanable funds curve
demand
supply: quantity supply depends on
the real interest rate
disposable income
expected future income
wealth
default risk
equilibrium
changes in demand and supply
government in the loanable funds market
a government budget surplus increases the supply of funds
a government budget deficit increases the demand for funds
