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lecture 4: saving investment and the financial system , financial system …
lecture 4: saving investment and the financial system
Types and functions of financial institutions
financial system
: the group of institutions that match saving of people with the investment of another
finacial intermediaries:
institutions through savers to
indirectly
provide funds to borrowers
banks:
mutual funds
financial market:
institutions through savers to
directly
provide funds to borrowers
bond market
stock market
types of saving
differen bwt saving and investment
Investment
is the purchase of new capital ( buy equipment, new machine, new house) in economic, investment is
not
buy stocks and bonds
3 types:
:check:
private saving:
household use extra money to save (not use for C or pay Taxes: buy bond/equities, bank deposit, mutual fund share, saving/checking account ) =
Y -T - C
:check:
public saving:
tax revenue - goverment spending =
T - G
:check:
national saving:
nation income not use for C and G, public saving+public saving = (Y-T-C) + (T-G) =
Y-C-G
national saving = investment in closed economy = (
I = Y - C - G
)
budget surplus: more tax that G =
T - G
= public saving
budget deficit: more G than T =
G - T
= - (public saving)
The market for loanable funds: the supply-demand models for financial system
how goverment policy affect saving, investment, interest rate
policy 1:
saving incentives ( tax incentives to incre Q of supply loanable funds) tax law incre saving => shift supply right => i fall => stimulate investment => incre Q of loanable funds
policy 2
: investment tax credit give tax advantage, encourage invest more => incre demand for loanable funds => rise i => rise Q of loanable funds
+
policy 3:
Goverment budget deficits and surplus
when the G more than T revenue, result budget deficit cause fall national saving (public saving fall) => the S loanable funds fall and ir rise then fall E Q of loanable funds
When the government reduces national saving by running a budget deficit, the interest rate rises, and investment falls.
crowding out: reduce I by increase G, => fall growth productivity and GDP
how financial system coordinate saving and investment
x=loanable funds, y=interest rate
supply curve:
show saving from household, public saving (tax revenue) i incre => saving attractive => incre the quatity loans fund (move)
demand curve:
firm want buy equipment, household buy new house. decr i => decr cost borrow => incr quantity loanable fund demand
i adjust to equate D and S,
financial system
(financial institutions)
financial intermediaries
banks
mutual funds
financial market
bonds
stocks