Econ - III Savings, Investment and the Financial System

What is Savings?

how much more income someone has compared to what they want to spend

what are Financial Markets

institutions through which people who have moneny can save that money by giving it to people or a company that need money for investing

What are the 2 types of Financial Markets

-Bond Market

-Stock Market

What is a bond

a certificate of indebtedness that also has special obligations of the borrower to the owner of the moneny

What is the Date of Maturity of the bond

the date by which the debt has to be paid

Bond have an interest rate

True

1 multiple choice option

What is the Principal of the bond

the original value of the bond before any interest

What type of Finance are Bonds called?

Debt Finance (bank give money, you pay off with interest)

Longer Maturity Rates for a bond will make it less risky?

False

1 multiple choice option

What would make a Bond more risky because it could cause the seller of the bond to not be able to pay it back

Higher interest rates

What does it mean to default on a bond

the Seller defaults on a bond when they can't pay it back

What is Stock and what determines the success of buyers

buyers share ownership in the company, so their success depends on how well the company does

What type of Finace is a stock

Equity Finance

what are 2 examples of Stock Markets

-New York Stock Exchange (NYE)

-National Association of Securities Dealers Automated Quotation System (NASDAQ)

How Can share/stock holders make money off their stocks

-through Dividends

-Selling the stocks once they increase in Value compared to what the share holder bought the stock for

what are Dividends

payments made by companies to their shareholders based on the number of shares they own

Companies receive Revenue when their stock is exchanged between to separate economic Actors, and Selling new stocks isn't the only way for Companies to generate money from stocks

False

1 multiple choice option

what are Intermediaries

third-parties linking two others [Banks, Mutual Funds]

what are Mutual funds?

Investment where money from many investors is pooled together to purchase a diversified portfolio of securities like stocks, bonds, or other assets

What do Mutual funds do?

-offer a way to buy bonds & stocks at a cheaper cost

-Mutual funds allow for higher levels of diversification

-Mutual funds are also assisted from professional money managers

What can small businesses who can't issue stocks use to get a temporary form of money?

They can take out Loans from a bank (intermediary)

Investment should always equal savings in a closed Economy

True

1 multiple choice option

What variable represents savings?

Y

because Savings = Investment what could you define savings as Equal to?

-Savings = Income + Consumption + government

-Private Savings (Y - C - T ) + Government savings (T - G)

What are Private Savings

how much households have left over to pay for taxes & pay for consumption

What are Government Savings

money made through taxes

If T-G is Positive the Government is running a?

budget surplus

If T-G is Negative the Government is running a?

budget deficit

What happens when the Government is Running a budget Deficit

investment is reduced [reducing living standards]

What is Net capital outflow (NCO)

PURCHASE OF FOREIGN CAPITAL - FOREIGN PURCHASES OF DOMESTIC GOODS

What is Crowding Out

When a Government in a Budget Deficit it leads to increasing interest rates which lowers the standard of living

What Causes Crowding Out?

When the Government is in a Budget Deficit it borrows more money, which shrinks the money supply stopping business from taking the loans to invest, so investment goes down

What are the 2 types of International capital Outflows?

-Foreign Direct Investment

-Portfolio Investment

What is Foreign Direct Investment

when a company or person gets foreign goods that they will actively manage

What is Portfolio Investment

When FOreign bonds or stocks are sold to domestic buyers

NCO = NX

True

1 multiple choice option

In an Open Economy how can you find the difference between the amount of savings and investment

the amount of NCO is the difference

If NCO is negative then what is the relationship between savings and Investment

Investment > Savings

if NCO is positive then what is the relationship between savings and investment

Investment < Savings

What is An interest Rate?

the price of a loan

what is Nominal Interest Rate

-Measures the price of money and reflects current rates and market conditions

-Not adjusted for inflation

what is Real interest Rate?

-Measures purchasing power and shows how much you or a lender actually earned from interest paid

-Adjusted for inflation

what is the equation for Real interest rate

NOMINAL RATE - RATE OF INFLATION

when are Real interest rates Positive

When nominal interest rates are higher than inflation rates

when are Real interest rates Negative

When nominal interest rates are lower than inflation rates

What is the relationship between purchasing power and interest rates

when real interest rates are positive it means you have more purchasing power and vice versa when real interest rates are negative

Where does the Real interest rate normally gravitate too?

Equilibrium Rate

How can you find the Equilibrium rate ( real interest rate)

The intersection of the Demand Curve for savings and the Supply curves for savings

When looking at a Graph for Savings, what is on the Y and X axis

-X Axis = the quantity of Savings

-Y Axis = the Real interest Rate

what is "Quantity of savings Supplied

-It is the quantity of credit provided at every real interest rates by banks and other lenders in an economy. ( The amount of money being loaned out)

-made up of lenders

What is Quantity of Saving Demanded?

-quantity of savings wanted and needed at every real interest rate by borrowers in an economy. ( the amount of money being borrowed)

-Made up of Borrowers

Why is the Demand Curve for Savings a downward sloping line?

the cost of a loan is its interest rates, meaning that the higher the interest rates the more expensive the loan will be and the less borrowers will want to take out, however as the interest rates drop the price of the loan becomes less and less and demand for loans will increases

Why is the Supply curve for Savings upward sloping

the cost of a loan is its interest rate, meaning that the higher the interest rate the more money lenders will make by lending out money, when interest rates are high lenders will want to give loans because it will make them rich, as interest rates drop lenders will make less from loans and be less incentiveized to do so

What are the sifters of the Demand for loan able funds curve?

-Foreign Demand for domestic currency

-All Borrowing, Lending, and Credit

-Deficit Spending

-Expectations for the Future

How does Foreign Demand for domestic currency affect the Demand for loanable funds curve?

More foreign demand increases the amount of demand for lonable funds and shifts it to the right and vice versa

How does All Borrowing, Lending, and Credit affect the Demand for loanable funds curve?

Increasing the amount of Borrowing, Lending and Credit all increases the amount of Demand for loanable funds and shift it to the right and vice versa

How does Government Deficit Spending affect the Loanable funds market

Increased Government Deficit spending will lead to a right ward shift in demand or a leftward shift in supply ( both are correct) Both of which lead to a HIGHER real interest rate

Why does Government spending do what it does to the loanable funds market?

-Because when the government runs a deficit it has to borrow money meaning that the government demand for savings is not added to the demand curve shifting it to the right

-Because the government is borrowing money that means that it is taking away from the amount of loanable funds for the private sector meaning that the supply for loanable funds for the public decreases as the government takes it away

How does Expectations for the Future affect the Demand for loanable funds curve?

When people think that the future is gonna be awesome and interest rates are gonna fall then they will start to demand more shifting the curve to the right and vice versa

What happens below the Equilibrium Rate?

borrowers would not be able to find a lender -> competition to obtain available funds drives up interest rate

What happens above the Equilibrium Rate?

there is an excess supply of funds -> competition is shifted to lenders causing rates to fall

How would New Technology shift the Savings graph?

rightward shift in the Demand Curve of savings leading to a higher Interest rate, and higher amount of Supply and Demand for Savings

What does a A reduction in government saving (deficit) and more borrowing by the government causes?

The supply of saving for all the economy is reduced at every rate -> So the savings curve shifts left [Interest rates become higher]

What is the Effect of increasing interest rates?

Rising interest rates cause savings to rise [supply of savings]

What happens when the Government Reduces tax on Income through savings accounts

Supply for savings increases leading to a lower lower interest rate