saving and investment topic 5

the financial system

consists of group of institutions in the economy that help to match one persons savings with another persons investment

financial markets

institutions through which savers can directly provide funds to borrowers

Types of Financial Markets

bond and stock

financial intermediaries

financial institutions through which savers can indirectly provide funds to borrowers

types of financial intermediaries

banks and investment funds

stock ( or more commonly share)

represents a claim to partial 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

national saving is equal to

S=I

national saving is the

the total income in the economy that remains after paying for consumption and government purchases

private saving is the

amount of income that households have left after paying their taxes and paying for their consumption.

private saving is equal to

(Y-T-C)

public saving is the

amount of tax revenue that the government has left after paying for its spending.

public saving is equal to

(T-G)

If T > G

budget surplus

If G > T

budget deficit

with a gov deficit

public saving is negative

government deficit refers to a situation where

a government spends more than it generates in tax revenue and has to borrow to fund spending

For the economy as a whole,

Saving must be equal to investment

nominal interest rate is the interest rate

usually reported and not correct for inflation

real interest rate is the

nominal interest rate that is corrected for the effects of inflation

real interest rate =

nominal interest rate - inflation