Macro Ch. 13 – Flashcards
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Financial System
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the group of institutions that helps match the saving of one person with the investment of another.
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Financial Markets
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institutions through which savers can directly provide funds to borrowers. Examples:
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Bond
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is a certificate of indebtedness.
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Stock
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is a claim to partial ownership in a firm.
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Financial Intermediaries
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institutions through which savers can indirectly provide funds to borrowers. Examples:
Banks
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Mutual Funds
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institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds
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Private Saving
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The portion of households' income that is not used for consumption or paying taxes
=Y-T-C
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Public Saving
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Tax revenue less government spending =T-G
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National Saving
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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
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Budget Surplus
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an excess of tax revenue over govt spending Taxes>Government Spending
= T - G public saving (positive +)
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Budget Deficit
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a shortfall of tax revenue from govt spending Taxes
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Private Saving
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is the income remaining after households pay their taxes and pay for consumption.
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Investment
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is the purchase of new capital.
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The slope of the supply curve
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An increase in the interest rate makes saving more attractive, which increases the quantity of
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The demand for loanable songs comes from investment
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Firms borrow the funds they need to pay for new equipment, factories, etc.
Households borrow the funds they need to purchase new houses.
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The supply of loanable funds comes from saving:
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Households with extra income can loan it out and earn interest.
Public saving, if positive, adds to national saving and the supply of loanable funds.
If negative, it reduces national saving and the supply of loanable funds.
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Assume: only one financial market
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All savers deposit their saving in this market.
All borrowers take out loans from this market.
There is one interest rate, which is both the return to saving and the cost of borrowing.
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The slope of the demand curve
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A fall in the interest rate reduces the cost of borrowing, which increases the quantity of loanable funds demanded
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Saving Incentives
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Tax incentives for saving increase the supply of L.F.
Interest Rate
...which reduces the eq'm interest rate
and increases the
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Investment Incentives
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An investment tax credit increases the demand for L.F.
Interest Rate
...which raises the eq'm interest rate
and increases the eq'm quantity of
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Crowding Out
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The govt borrows to finance its deficit, leaving less funds available for investment.
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US Government Debt
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The government finances deficits by borrowing (selling government bonds).
Persistent deficits lead to a rising govt debt.
The ratio of govt debt to GDP is a useful measure of the government's indebtedness relative to its ability to raise tax revenue.
Historically, the debt-GDP ratio usually rises during wartime and falls during peacetime—until the early 1980s.
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Ch. 13 Summary
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• The U.S. financial system is made up of many types of financial institutions, like the stock and bond markets, banks, and mutual funds.
• National saving equals private saving plus public saving.
• In a closed economy, national saving equals investment. The financial system makes this happen.
• The supply of loanable funds comes from saving. The demand for funds comes from investment. The interest rate adjusts to balance supply and demand in the loanable funds market.
• A government budget deficit is negative public saving, so it reduces national saving, the supply of funds available to finance investment.
• When a budget deficit crowds out investment, it reduces the growth of productivity and GDP.
