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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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| institutions through which savers can directly provide funds to borrowers |
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| Financial markets Examples |
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| : bond markets and stock markets |
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| certificate of indebtedness that specifies the obligations of the borrower to the lender (holder of the bond) |
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| the time at which the loan will be repaid |
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| The eventual repayment of the amount borrowed |
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| The length of time until a bond matures |
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| bond that pays interest forever, but the principal is never repaid. |
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| The probability that the borrower will repay some of the interest or principal |
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| bonds with high default risk |
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| bonds issued by state and local governments. |
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| claim to partial ownership in a firm |
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| ale of stocks to raise money |
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| Sale of bonds to raise money |
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| Organized markets for the sale of already existing stocks |
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| an Index computed as an average of a group of stock indexes. Example: Dow Jones Industrial Average, S&P 500 |
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| institutions through which savers can indirectly provide funds to borrowers |
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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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| buy all the stocks in a given index |
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The portion of households’ income that is not used for consumption or paying taxes
S=Y-C-T |
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Tax revenue less government spending
S=T-G |
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An economy that does not interact with other economies
For a closed economy I=S
Savings S=(Y-C-T)+(T-G). |
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| economy that interacts with other economies. |
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private saving + public saving
= (Y – T – C) + (T – G) |
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| . Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 2,500, consumption equals 7,000, and government purchases equal 3,000. What are private saving and public saving? |
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| PrS= Y-T-C=11,000-2500-7000=1500, PuS=T-G=2500-3000=-500 |
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Suppose GDP equals $10 trillion, consumption equals $6.5 trillion, the government spends $2 trillion and has a budget deficit of $0.3 trillion.
Find public saving, taxes, private saving, national saving, and investment. |
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Definition
Given: Y = 10.0, C = 6.5, G = 2.0, G – T = 0.3
Public saving = T – G = – 0.3
Taxes: T = G – 0.3 = 1.7
Private saving = Y – T – C = 10 – 1.7 – 6.5 = 1.8
National saving = Y – C – G = 10 – 6.5 = 2 = 1.5
Investment = national saving = 1.5 |
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| loanable funds comes from saving |
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Definition
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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| Policies that affect Saving and Investmet |
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Definition
Tax cuts on interest and dividend income
- Encourage saving
- Shifts the supply of loanable funds curve to the right.
- Reduces interest rate
- Increases equilibrium quantity of loanable funds |
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| a policy that gives tax advantage to a firm building a new factory or buying a new piece of equipment |
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Investment Tax Credit
- Encourage Investment |
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Definition
Shifts the demand for loanable funds curve to the right.
- Increases interest rate
- Increases equilibrium quantity of loanable funds |
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| The govt borrows to finance its deficit, leaving less funds available for investment |
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| Increase in budget deficit causes |
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| The field that studies how people make decisions regarding the allocation of resources over time and the handling of risk |
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| Amount of money today that would be needed using prevailing interest rates to produce a given future amount of money |
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| Amount of money in the future that an amount of money today will yield given prevailing interest rates |
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| Accumulation of a sum of money when interest earned remains in an account to earn additional interest in the future |
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| Finding the present value for a future sum of money |
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Interest rate = r = 10%
Future value = 100+10%(100) =100+10=110
FV =PV+r(PV)=PV(1+r)
For two years, FV = PV(1+r)(1+r)
For N years, FV=PV(1+r)N
Present value = X/(1+r)N |
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Given that Future value = $200 in N years
Interest rate = r
Present value = $200/(1+r)N
Present value = X/(1+r)N; PV and r are inversely related. |
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| Present Value, Future Value and the Rule of 70. |
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| IF a variable grows at a rate of X% annually, it will take approximately 70/X years for the variable to double. |
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| Spread the risks around more efficiently |
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| more likely to apply for insuranc |
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| After people buy insurance - less incentive to be careful |
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Can eliminate firm-specific risk
Cannot eliminate market risk |
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| The higher the standard deviation less risky or riskier |
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| Description that asset prices rationally reflect all available information |
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| Implication of efficient markets hypothesis |
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| Stock prices changes should be impossible to predict |
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| makes saving more attractive and increases quantity of laonable funds |
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| reduces cost of borrowing which increases quantity of loanable funds demanded |
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| Tax Cuts on interest and dividend income (Investment Tax Credit has some effects) |
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| encourage saving, shift supply of loanable funds right, reduces interest, increases equilibrium of loanable funds |
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| tax incentives for saving increase supply of loanable funds, which reduces the interest rate |
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| Investment tax Credit increases demand for Loanable Funds |
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| which raises the interest rate and increases the quantity of LF |
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| reduces nationa saving and supply of loanable funds which increases interest and decreases the quantity of loanable funds and investment |
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Study of a company’s accounting statements
and future prospects to determine its value |
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| When price of an asset is above its fundamental value |
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| Market is experiencing a speculative bubble – waves pessimism and optimism |
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