lecture 11 saing investment and the financial system

Financial system

Group of institutions in the economy that help to match one person’s saving with another person’s investment

Financial institutions

Institutions through which savers can directly provide

funds to borrowers Ex financial markets , financial intermediaries

Financial market

Financial institutions through which savers can directly provide funds to borrowers ex the bond market or the stock market

A bond

Is like a loan however it can have higher interest so higher risk and isn’t issued by a bank but by anyone . And it can be sold and bought by anyone .

Debt finance

Sale of bonds to raise money

Four characteristics of a bond

The length of the bond is long term And some never mature

Credit risk

Some bond revenues have to pay taxes based in the country its issued

Inflation protection

A stock

Is a claim to partial ownership of a firm

Is a claim to some of the profits the firm makes

Carries a great risk but offers higher returns

Equity finance

Sale of stock to raise money

Stock exchange

Trading stock shares stockholders

– The business (that issued the stock) receives no money

Prices of shares on stock exchange is determined by

The supply of and demand for the stock in these companies

A stock index

Is multiple companies grouped into one stock like the Dow jones industrial average or the s and p 500

Financial intermediaries

Primary roles of banks

Take in deposits from savers (small interest rate)

– Use these deposits to make loans to borrowers (charge

a higher interest rate)

Secondary role for banks

Facilitate purchases of goods and services

• Checks and debit cards to access deposits

• Medium of exchange

• Store of value

National saving equation

S=Y-C-G

Private saving

The income that households have left after paying for taxes and

consumption

Private saving equation

Y-T-C

Public saving

Tax revenue that the government has left after paying for its spending

Public saving formula

T-G

Budget surplus

Excess of tax revenue over government spending = public saving

Budget deficit

Shortfall of tax revenue from government spending = –(public saving)