Lecture 8 saving investment and the financial system
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Transcript of Lecture 8 saving investment and the financial system
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Macroeconomics
Lecture 8
Saving, Investment, and the Financial System
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Questions
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Life Expectancy
http://www.worldlifeexpectan
cy.com/world-life-
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Phone call
New York to Los Angeles
1915 90 hours
2016 1 second
- 99.99%
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Inputs
Output
Innovation
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Inputs
Output
Innovation
Innovation
Innovation
Innovation
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Scarcity + Innovation
createsAbundance
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Compounding (1 + r)n
r = rate n = number of periods
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Grow at 10% for 5 years
(1 + r)n
(1 +.10)5
= 1.61
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10% for 5 years 2% for 15 years 8% for 20 years 4% for 10 years 5% for 50 years
1.61 1.35 4.66 1.48 11.47
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Saving, Investment, and the
Financial System
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Key Conceptsfinancial systemfinancial marketsbondstockfinancial intermediariesmutual fund
national savingprivate savingpublic savingbudget surplusbudget deficitmarket for loanable fundscrowding out
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I. O. UI Owe YouPromises
Name Amount
DateSignature
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Promissory Note
Trading paper for paper
I.O. U.
10 DollarsDr. Gale
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Financial System
Institutions that match people who save
money with people who need money
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Financial Instruments
I.O.UsSimple to Complex
RelationshipContract
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Financial System
Two categories
Financial Markets
Financial Intermediaries
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Financial Markets
Bond Market
Stock Market
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Financial Markets
Bonds - Borrow - Debt
Stocks - Sell OwnershipsEquity
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Bond Markets
What is a Bond?
Certificate of Indebtedness
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Rexburg Pizza Company
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Rexburg Pizza Company
Borrowor
Sell ownership shares
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Rexburg Pizza Company
Bond
100Dollars
Dr. GaleCEO
10% 2023
Pays 10 Dollars each yearPays 100 Dollars at maturity
2014Coupon
2015Coupon
2016Coupon
2017Coupon
2018Coupon
2019Coupon
2020Coupon
2021Coupon
2022Coupon
2023Coupon
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Bond
Term - Length of time
Credit Risk - chance of default
Tax - How is the interest or profit taxed
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Stock
Ownership ShareCompany sells once
Then resold to other buyersLimited Liability
No promises of profitEquity position
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Rexburg Pizza Company
Need to raise 1,000 Dollars
Create 1,000 shares and sell for 1 Dollar each
Each share is worth 1/1,000 of the company
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Rexburg Pizza Company
Stock Certificate
One Share
Dr. GaleCEO
Current Share Owner: Bill Gates
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