Macro -Topic 4 – Saving, Investment, and Financial System

Vocabulary flashcards covering key concepts of saving, investment, financial institutions, national accounting identities, and the loanable funds market.

Financial System

The group of institutions in the economy that help match the saving of one person with the investment of another.

Saving (in Economics)

The part of income that is not spent on consumption, which is used to buy financial assets such as bank deposits, stocks, and bonds.

Investment (in Economics)

Spending by businesses on equipment, structures, and software, as well as spending by households on new homes.

Financial Markets

where savers can directly provide funds to borrowers, such as the bond market and stock market.

Bond

A certificate of indebtedness that represents a promise to repay money.

Stock

A claim to partial ownership in a firm, which provides a claim on its future profits.

Equity Financing

The process of raising funds by selling stock in a company.

Stock Index

Measure that tracks the performance of a selected group of stocks.Commonly used to evaluate overall market trends.

Financial Intermediaries

Financial institutions through which savers can indirectly provide funds to borrowers, such as banks and mutual funds.

Bank

A financial intermediary that accepts deposits from savers, makes loans to borrowers, and assists in making payments.

Mutual Fund

An institution that sells shares to the public and uses the proceeds to buy portfolios of stocks and bonds.

National Saving ($S$)

The total income in the economy that remains after paying for household consumption ($C$) and government purchases ($G$), expressed as $S = Y - C - G$.

Private Saving ($S_p$)

The amount of income households have left after paying for taxes ($T$) and consumption ($C$), expressed as $S_p = Y - T - C$.

Public Saving ($S_g$)

The amount of tax revenue that the government has left after paying for its spending ($G$), expressed as $S_g = T - G$.

Budget Surplus

An excess of tax revenue over government spending ($T > G$), representing positive public saving.

Budget Deficit

A shortfall of tax revenue relative to government spending ($T < G$), representing negative public saving.

Market for Loanable Funds

The financial market in which saving supplies funds, investment demands funds, and the real interest rate acts as the price.

Crowding Out

A decrease in private investment that results from government borrowing to finance a budget deficit.