Saving, Investment, and the Financial System. The Financial System The financial system consists of...
-
date post
19-Dec-2015 -
Category
Documents
-
view
225 -
download
0
Transcript of Saving, Investment, and the Financial System. The Financial System The financial system consists of...
![Page 1: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/1.jpg)
Saving, Investment, and the Financial System
![Page 2: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/2.jpg)
The Financial System
• The financial system consists of institutions that help to match one person’s saving with another person’s investment.
• It moves the economy’s scarce resources from savers to borrowers.
• The financial system is made up of institutions(Markets and Intermediaries)
![Page 3: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/3.jpg)
Financial Institutions in the U.S. Economy
• Financial Markets Stock Market Bond Market
• Financial Intermediaries Banks Mutual Funds
![Page 4: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/4.jpg)
Other Financial Institutions
• Credit unions• Pension funds• Insurance companies• Loan sharks
![Page 5: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/5.jpg)
The Bond Market
A bond is a certificate of indebtedness that specifies obligations of the borrower to the holder of the bond.
IOU
![Page 6: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/6.jpg)
Characteristics of a Bond
• Term: The length of time until the bond matures.
• Credit Risk: The probability that the borrower will fail to pay some of the interest or principal.
• Tax Treatment: The way in which the tax laws treat the interest on the bond. Municipal bonds are federal tax exempt.
![Page 7: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/7.jpg)
Stock Market Basics
• What is Stock?– A stock is a
tradable security that a firm issues to certify that the stockholder owns a share of the firm.
– Figure 19.1 shows an example of a stock certificate.
![Page 8: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/8.jpg)
• Stock represents ownership in a firm and is therefore, a claim to the profits that the firm makes.
• The sale of stock to raise money is called equity financing. Compared to bonds, stocks offer both higher
risk and potentially higher returns.
The Stock Market
![Page 9: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/9.jpg)
The Stock Market
The most important stock exchanges in the United States are the New York Stock Exchange, the American Stock Exchange, and NASDAQ.
![Page 10: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/10.jpg)
The Stock Market
Most newspaper stock tables provide the following information:
• Price (of a share)• Volume (number of shares sold)• Dividend (profits paid to stockholders)• Price-earnings ratio
![Page 11: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/11.jpg)
Stock Market Basics
• Reading the Stock Market Report– Figure 19.2 in the textbook shows a part of a page
from of the Wall Street Journal.
![Page 12: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/12.jpg)
The Market for Loanable Funds
Loanable funds refers to all income that people have chosen to save and lend out, rather than use for their own consumption.
![Page 13: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/13.jpg)
Loanable Funds (in billions of
dollars)
0
Interest Rate
Demand
Supply
5%
$1,200
Market for Loanable Funds...
![Page 14: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/14.jpg)
Government Policies That Affect Saving and Investment
• Taxes and saving• Taxes and investment• Government budget deficits
![Page 15: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/15.jpg)
S2
1. Tax incentives for saving increase the supply of loanable funds...
An Increase in the Supply of Loanable Funds...
Loanable Funds (in billions of
dollars)
0
InterestRate
5%
Supply, S1
$1,200
Demand
$1,600
3. ...and raises the equilibrium quantity of loanable funds.
4%
2. ...which reduces the equilibrium interest rate...
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
![Page 16: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/16.jpg)
An Increase in the Demand for Loanable Funds...
Loanable Funds(in billions of
dollars)
0
InterestRate
5%
$1,200
Supply
Demand, D1
1. An investment tax credit increases the demand for loanable funds...
D2
6%
2. ...whichraises the equilibrium interest rate...
$1,4003. ...and raises the equilibrium quantity of loanable funds.
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
![Page 17: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/17.jpg)
Government Budget Deficits and Surpluses
• When the government spends more than it receives in tax revenues, the short fall is called the budget deficit. – For 2003, the budget deficit is $307 billion
• The accumulation of past budget deficits is called the government debt.– For 2003, the total debt is 6.7 trillion.
![Page 18: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/18.jpg)
Government Budget Deficits and Surpluses
• Government borrowing to finance its budget deficit reduces the supply of loanable funds available to finance investment by households and firms.
• This fall in investment is referred to as crowding out. The deficit borrowing crowds out private
borrowers who are trying to finance investments.
![Page 19: Saving, Investment, and the Financial System. The Financial System The financial system consists of institutions that help to match one person ’ s saving.](https://reader030.fdocuments.net/reader030/viewer/2022032800/56649d3f5503460f94a194bc/html5/thumbnails/19.jpg)
S2
1. A budget deficit decreases the supply of loanable funds...
The Effect of a Government Budget Deficit...
Loanable Funds(in billions of dollars)
0
InterestRate
$1,200
Supply, S1
Demand
5%
$8003. ...and reduces the equilibrium quantity of loanable funds.
2. ...which raises the equilibrium interest rate...
6%
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.