Expert answer:1 Page Total sumarrizing two powerpoints

Answer & Explanation:New Macro Week 6 Ch 7 Production and Growth-1.pptNew Macro Week 6 Ch 8 Saving, Investment, and the Financial System-1.ppt
new_macro_week_6_ch_8_saving__investment__and_the_financial_system_1.ppt

new_macro_week_6_ch_7_production_and_growth_1.ppt

new_macro_week_6_ch_7_production_and_growth_1.ppt

new_macro_week_6_ch_8_saving__investment__and_the_financial_system_1.ppt

Unformatted Attachment Preview

13
Saving, Investment, and
the Financial System
PowerPoint Slides prepared by:
Andreea CHIRITESCU
Eastern Illinois University
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
1
Financial Institutions
• Financial system
– Group of institutions in the economy
• That help match one person’s saving with
another person’s investment
– Moves the economy’s scarce resources
from savers to borrowers
• Financial institutions
– Financial markets
– Financial intermediaries
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2
Financial Markets
• Financial markets
– Savers can directly provide funds to
borrowers
– The bond market
– The stock market
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
3
Financial Markets
• The bond market
– Bond: certificate of indebtedness
• Date of maturity, when the loan will be repaid
• Rate of interest, paid periodically until the
date of maturity
• Principal, amount borrowed
– Borrowing from the public
• Used by large corporations, the federal
government, or state and local governments
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4
Financial Markets
• The bond market
– Term: length of time until maturity
• A few months, 30 years, perpetuity
• Long-term bonds are riskier than short-term
bonds
– Long-term bonds usually pay higher interest rates
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5
Financial Markets
• The bond market
– Credit risk: probability of default
• Probability that the borrower will fail to pay
some of the interest or principal
• Higher interest rates for higher probability of
default
• U.S. government bonds tend to pay low
interest rates
• Junk bonds, very high interest rates
– Issued by financially shaky corporations
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6
Financial Markets
• The bond market
– Tax treatment
• Interest on most bonds is taxable income
• Municipal bonds
– Issued by state and local governments
– Owners are not required to pay federal income tax
on the interest income
– Lower interest rate
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7
Financial Markets
• The stock market
– Stock: claim to partial ownership in a firm
• A claim to the profits that a firm makes
– Organized stock exchanges
• Stock prices: demand and supply
– Equity finance
• Sale of stock to raise money
– Stock index
• Average of a group of stock prices
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
8
Financial Intermediaries
• Financial intermediaries
– Savers can indirectly provide funds to
borrowers
– Banks
– Mutual funds
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9
Financial Intermediaries
• Banks
– Take in deposits from savers
• Banks pay interest
– Make loans to borrowers
• Banks charge interest
– Facilitate purchasing of goods and
services
• Checks: medium of exchange
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
10
Financial Intermediaries
• Mutual funds
– Institution that sells shares to the public
– Uses the proceeds to buy a portfolio of
stocks and bonds
– Advantages
– Diversification; professional money managers
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
11
National Income Accounts
• Rules of national income accounting
– Important identities
• Identity
– An equation that must be true because of
the way the variables in the equation are
defined
– Clarify how different variables are related
to one another
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
12
Accounting Identities
• Gross domestic product (GDP)
– Total income
– Total expenditure
• Y = C + I + G + NX
•
•
•
•
•
Y = gross domestic product, GDP
C = consumption
I = investment
G = government purchases
NX = net exports
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
13
Accounting Identities
• Closed economy
– Doesn’t interact with other economies
– NX = 0
• Open economy
– Interact with other economies
– NX ≠ 0
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
14
Accounting Identities
• Assume closed economy: NX = 0
•Y=C+I+G
• National saving (saving), S
• Total income in the economy that remains
after paying for consumption and
government purchases
• Y–C–G=I
•S=Y–C–G
•S=I
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15
Accounting Identities
• T = taxes minus transfer payments
•S=Y–C–G
• S = (Y – T – C) + (T – G)
• Private saving, Y – T – C
– Income that households have left after
paying for taxes and consumption
• Public saving, T – G
– Tax revenue that the government has left
after paying for its spending
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
16
Accounting Identities
• Budget surplus: T – G > 0
– Excess of tax revenue over government
spending
• Budget deficit: T – G < 0 – Shortfall of tax revenue from government spending © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 Saving and Investing • Accounting identity: S = I • Saving = Investment – For the economy as a whole – One person’s savings can finance another person’s investment © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 The Market for Loanable Funds • Market for loanable funds – Market • Those who want to save supply funds • Those who want to borrow to invest demand funds – One interest rate • Return to saving • Cost of borrowing – Assumption • Single financial market © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19 The Market for Loanable Funds • Supply and demand of loanable funds – Source of the supply of loanable funds • Saving – Source of the demand for loanable funds • Investment – Price of a loan = real interest rate • Borrowers pay for a loan • Lenders receive on their saving © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20 The Market for Loanable Funds • Supply and demand of loanable funds – As interest rate rises • Quantity demanded declines • Quantity supplied increases – Demand curve • Slopes downward – Supply curve • Slopes upward © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 Figure 1 The Market for Loanable Funds Interest Rate Supply 5% Demand 0 $1,200 Loanable Funds (in billions of dollars) The interest rate in the economy adjusts to balance the supply and demand for loanable funds. The supply of loanable funds comes from national saving, including both private saving and public saving. The demand for loanable funds comes from firms and households that want to borrow for purposes of investment. Here the equilibrium interest rate is 5 percent, and $1,200 billion of loanable funds are supplied and demanded. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22 The Market for Loanable Funds • Government policies – Can affect the economy’s saving and investment • Saving incentives • Investment incentives • Government budget deficits and surpluses © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23 Policy 1: Saving Incentives • Shelter some saving from taxation – Affect supply of loanable funds – Increase in supply • Supply curve shifts right – New equilibrium • Lower interest rate • Higher quantity of loanable funds – Greater investment © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 Figure 2 Saving Incentives Increase the Supply of Loanable Funds Interest Rate Supply, S1 S2 1. Tax incentives for saving increase the supply of loanable funds . . . 5% 4% 2. . . . which reduces the equilibrium interest rate 0 ... Demand $1,200 $1,600 Loanable Funds (in billions of dollars) 3. . . . and raises the equilibrium quantity of loanable funds. A change in the tax laws to encourage Americans to save more would shift the supply of loanable funds to the right from S1 to S2. As a result, the equilibrium interest rate would fall, and the lower interest rate would stimulate investment. Here the equilibrium interest rate falls from 5 percent to 4 percent, and the equilibrium quantity of loanable funds saved and invested rises from $1,200 billion to $1,600 billion. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25 Policy 2: Investment Incentives • Investment tax credit – Affect demand for loanable funds – Increase in demand • Demand curve shifts right – New equilibrium • Higher interest rate • Higher quantity of loanable funds – Greater saving © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26 Figure 3 Investment Incentives Increase the Demand for Loanable Funds Interest Rate Supply 6% 5% 2. . . . which raises the equilibrium interest rate ... 1. An investment tax credit increases the demand for loanable funds . . . D2 Demand, D1 Loanable Funds $1,200 $1,400 (in billions of dollars) 3. . . . and raises the equilibrium quantity of loanable funds. 0 If the passage of an investment tax credit encouraged firms to invest more, the demand for loanable funds would increase. As a result, the equilibrium interest rate would rise, and the higher interest rate would stimulate saving. Here, when the demand curve shifts from D1 to D2, the equilibrium interest rate rises from 5 percent to 6 percent, and the equilibrium quantity of loanable funds saved and invested rises from $1,200 billion to $1,400 billion. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27 Policy 3: Budget Deficit/Surplus • Government - starts with balanced budget – Then starts running a budget deficit • Change in supply of loanable funds • Decrease in supply – Supply curve shifts left • New equilibrium – Higher interest rate – Smaller quantity of loanable funds © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28 Figure 4 The Effect of a Government Budget Deficit Interest Rate S2 6% 1. A budget deficit decreases the supply of loanable funds . . . 5% 2. . . . which raises the equilibrium interest rate ... Supply, S1 Demand Loanable Funds (in billions of dollars) 3. . . . and reduces the equilibrium quantity of loanable funds. 0 $800 $1,200 When the government spends more than it receives in tax revenue, the resulting budget deficit lowers national saving. The supply of loanable funds decreases, and the equilibrium interest rate rises. Thus, when the government borrows to finance its budget deficit, it crowds out households and firms that otherwise would borrow to finance investment. Here, when the supply shifts from S1 to S2, the equilibrium interest rate rises from 5 to 6 percent, and the equilibrium quantity of loanable funds saved and invested falls from $1,200 billion to $800 billion. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29 Policy 3: Budget Deficit/Surplus • Crowding out – Decrease in investment – Results from government borrowing • Government - budget deficit – Interest rate rises – Investment falls © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30 Policy 3: Budget Deficit/Surplus • Government – budget surplus – Increase supply of loanable funds – Reduce interest rate – Stimulates investment © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 31 The history of U.S. government debt • Debt of U.S. federal government – As a percentage of U.S. GDP – Fluctuated • 0% of GDP in 1836 • 107% of GDP in 1945 • Declining debt-to-GDP ratio – Government indebtedness is shrinking relative to its ability to raise tax revenue – Government - living within its means © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 32 The history of U.S. government debt • Rising debt-to-GDP – Government indebtedness is increasing relative to its ability to raise tax revenue • Fiscal policy cannot be sustained forever at current levels • War – primary cause of fluctuations in government debt: – Debt financing of war – appropriate policy • Tax rates – smooth over time • Shifts part of the cost to future generations © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 33 Figure 5 The U.S. Government Debt The debt of the U.S. federal government, expressed here as a percentage of GDP, has varied throughout history. Wartime spending is typically associated with substantial increases in government debt. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 34 The history of U.S. government debt • President Ronald Reagan, 1981 – Large increase in government debt – not explained by war – Committed to smaller government and lower taxes – Cutting government spending - more difficult politically than cutting taxes – Period of large budget deficits – Government debt: 26% of GDP in 1980 to 50% of GDP in 1993 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or dupl ... Purchase answer to see full attachment

How it works

1. Paste your instructions in the instructions box. You can also attach an instructions file
2. Select the writer category, deadline, education level and review the instructions 
3. Make a payment for the order to be assignment to a writer
4.  Download the paper after the writer uploads it 

Will the writer plagiarize my essay?

You will get a plagiarism-free paper and you can get an originality report upon request.

Is this service safe?

All the personal information is confidential and we have 100% safe payment methods. We also guarantee good grades