Chapter 13 (ME)

Savings

A vehicle for transferring purchasing power to the future.

Investment

Purchases of new capital such as equipment or buildings, borrowing to finance those purchases.

National Income Account Identity

An equation that expresses the relationship between the total income of an economy and its expenditures (Y = C + I + G + NX).

Closed economy

An economy that does not engage in international trade.

Private saving

Leftover income households have after spending on consumption and paying taxes (Y - T - C).

Public saving

Leftover tax revenue that the government has after paying for all its spending (T - G).

Government budget deficit

Occurs when the government spends more than it collects in tax revenue (G - T > 0).

Government budget surplus

Occurs when the government collects more in tax revenue than it spends (T - G > 0).

Nominal interest rate

The rate of growth in the dollar value of a deposit or debt, not adjusted for inflation.

Real interest rate

The interest rate adjusted for inflation, indicating the growth in purchasing power.

Loanable funds

Income that people have chosen to save and lend out rather than consume; the amount investors borrow for new projects.

Supply of loanable funds

Comes from people who save extra income they want to lend out.

Demand for loanable funds

Comes from households and firms wishing to borrow for investments.

Equilibrium in the loanable funds market

Occurs when the quantity of loanable funds supplied equals the quantity demanded.

Fisher Equation

R = N - π; relates nominal interest rate, real interest rate, and inflation rate.

Savings incentives

Policies designed to encourage saving by reducing taxes on interest income.