Scribd
Upload
24 views21 pages

Chapter26 - Savings and Investment

The financial system helps match savers with investors by facilitating the movement of funds through financial markets and intermediaries. When individuals save, their funds are supplied to the market for loanable funds and can then be demanded and used by individuals and firms for investment purposes. Interest rates adjust to balance the supply and demand. Financial markets include bond markets, stock markets, and various financial intermediaries like banks and mutual funds that pool savings for lending and investment.

Uploaded by

creative common
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
24 views21 pages

Chapter26 - Savings and Investment

The financial system helps match savers with investors by facilitating the movement of funds through financial markets and intermediaries. When individuals save, their funds are supplied to the market for loanable funds and can then be demanded and used by individuals and firms for investment purposes. Interest rates adjust to balance the supply and demand. Financial markets include bond markets, stock markets, and various financial intermediaries like banks and mutual funds that pool savings for lending and investment.

Uploaded by

creative common
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 21

Chapter 26

Saving,Investment,and the
Financial System
How do we match one person's saving with
another person's investment?
Financial System

One person's Saving Financial Systems Another person's Investment

The financial system moves the economy's scarce resources from savers to borrowers
Financial Markets and Financial
Intermediaries
Bond
maturity
The Bond Markets
(Debt Finance) Credit
Risk
Financial Markets Tax
treatment

The Stock Markets


(Equity finance)
Financial Markets and Financial
Intermediaries (Cont…)
Deposit

Banks Loan
Financial Intermediaries
Medium of
exchange
Mutual
Funds

Diverse
portfolio of
stocks and bonds
Topics to Cover

 1. Financial Institution
 2. Saving and Investment in the National Income Accounts
 3. The Market for loanable funds (building a model of
financial markets)
National Saving
 Y:GDP
 C:Consumption
 I:Investment
 G:Government purchases
 NX: Net Exports
 S:National Savings
National Saving (cont…)

We know, Y= C + I + G + NX .......... (1)


 we assume a closed economy, so NX= 0
From (1) we get,
Y= C + I + G
 Y- C - G = I ...........(2)
National Saving
National Saving (cont…)

We know,
Savings = Total Income Left After Paying for Consumption and Government Purchase
From (2) I = Y – C- G
However,
S = Y- C- G ……… (3)

From (2) and (3)


 S= I
A nations savings produces the source of the nation’s investment
National Saving (cont…)

S=(Y-T-C)+(T-G)　

National
Savings Private Government/
Savings Public
Savings

When, T > G 　 Budget Surplus


T<G 　 Budget Deficit
T=G 　 Balanced Budget
The 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
The Market for loanable funds (cont…)

 The supply of loanable funds: coming from national savings, including both private savings and
public savings (comes from Savings)
 The demand of loanable funds: coming from household and firms who wish to borrow to make
investment (comes from Investment)
 Interest rate: the price of loan and adjusting to balance the supply and demand for loanable funds
The Market for loanable funds (cont…)

 Demand curve for loanable funds slops downward


 Interest rate (r) and Demand (D) are negatively related
 Supply curve for loanable funds slops upward
 Interest rate (r) and Supply (S) are positively related
Three steps to analyzing changes in
equilibrium
 1. Decide whether the event shifts the supply or demand curve(or
perhaps both)

 2. Decide in which direction the curve shifts

 3. Use the supply-and-demand diagram to see how the shifts changes


the equilibrium price and quantity
Policy1: Saving Incentives

1st Step: A change in the tax law to encourage people to save more would shift the supply curve
2nd Step: The supply would increase and the supply curve would shift to the right
3rd Step: The increase in supply reduces the interest rate from 5% to 4% as S>D. This decrease in r, increases the D to bring a new
equilibrium
Policy 2: Investment Incentives

1st Step: The passage of investment tax credit to encourage firms to invest more would shift the demand curve
2nd Step: The demand would increase, and the demand curve would shift to the right
3rd Step: The increase in demand increases the interest rate from 5% to 6% as D>S. This increase in r, increases the S to bring a
new equilibrium
Policy 3: Government Budget Deficits and Surplus

1000

1st Step: A change in the government budget balance represents a change in public saving, and in the supply of loanable funds
2nd Step: A budget deficit shifts the supply curve for loanable funds to the left
3rd Step: The decrease in supply increases the interest rate from 5% to 6% as D>S. This increase in r, decreases the D to bring a
new equilibrium
In-Class Activity

Find out, What happens to the market for loanable


funds when government faces budget surplus?
Conclusion

 Financial markets serve the important role of linking the present and
the future
 Those who supply loanable funds do so because they want to
convert some of their current income into future purchasing power
 Well-functioning financial markets are important not only for
current generations but also for future generations
Solve this problem
Given,
 Y = 10000
 C= 6000
 T= 1500
 G= 1700
 I = 3300 – 100 r
Find out,
a) National Saving? S= Y- C -G = 10000- 6000 – 1700 = 2300
b) Private Saving? Y- T –C = 10000 – 6000 – 1500 = 2500
c) Public Saving? T – G = 1500 – 1700 = -200
d) r=? S=I, 2300= 3300 – 100r , r = 10%
r

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy