Macroecon Lecture 5

savings–investment spending identity

savings–investment spending identity

saving and investment spending are always = for economy as a whole

budget surplus

difference between tax revenue and government spending when tax revenue exceeds government spending

budget deficit

difference between tax revenue and government spending when government spending exceeds tax revenue

budget balance

difference between tax revenue and government spending

national savings

the sum of private savings and the budget balance; is the total amount of savings generated within the economy

GDP = C + I + G

total income = total spending

net capital inflow

total inflow of funds into a country minus the total outflow of funds out of a country. financial capital can be used for investment spending

NCI = IM - X

mathematical equation for net capital inflow in terms of imports and exports

I = S_national + NCI

mathematical equation for Investment in relation to net capital inflow and national savings

loanable funds market

hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders

present value

the _____ of X is the amount of money needed today in order to revieve X at a future date given the interest rate

demand for loanable funds

this increases as interest rates decrease

X = $/(1 + r)

present value equation

supply of loanable funds

this increases as interest rates increase

shifts on demand of loanable funds

changes in perceived business opportunities and changes in government borrowing

crowding out

when a government budget deficit drives up the interest rate and leads to reduced investment spending

shifts in the supply of loanable funds

changes in private savings behaviors and changes in net capital inflows

fisher effect

the expected real interest rate is unaffected by changes in expected future inflation; the nominal interest rate rises to match expected future inflation

wealth

value of accumulated savings

financial asset

paper claim that entitles the buyer to future income from seller

physical asset

is a tangible object that can be used to generate future income

liability

requirement to pay income in the future

loan

lending agreement between a lender and borrower; a financial asset owned by the lender and a liability from the person to whom it has been issued

transaction costs

expenses of putting together and executing a deal

three tasks of a financial system

reducing transaction costs, reducing risk, and providing liquidity

financial risk

uncertainty about future outcomes that involve losses or gains

diversification

investing in several different things to lower total risk; losses are independent events

liquid

something that can quickly be converted into cash with little loss of value

illiquid

something that cannot be quickly converted into cash with little loss of value

default

when a borrower fails to make payments as per a loan or bond contract

loan-backed securities

asset created by polling individual loans and selling shares of that pool