Chapter 27 and 28 Definitions: Saving and Investment and Finance

Financial system: the group of institutions in the economy that help to match one person’s saving with another person’s investment.

Financial markets: financial institutions through which savers can directly provide funds to borrowers.

Bond: a certificate of indebtedness.

Finance: the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk.

Present value (PV): the amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money.

Future value (FV): the amount of money in the future that an amount of money today will yield, given prevailing interest rates.

Stock: a claim to partial ownership in a firm.

Financial intermediaries: financial institutions through which savers can indirectly provide funds to borrowers.

Mutual fund: an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds.

Private saving: the income that households have left after paying for taxes and consumption.

Public saving: the tax revenue that the government has left after paying for its spending.

Budget Surplus: Tax Revenue > Government Spending

Budget Deficit: Tax Revenue < Government Spending

Market for loanable funds: the market in which those who want to save supply funds and those who want to borrow to invest demand funds.

Crowding out: a decrease in investment that results from government borrowing.