ECON 101 Ch. 29: Saving, Investment, and the Financial System
zero-coupon bond
a bond that makes no coupon payments and is thus initially priced at a deep discount
why do people borrow money?
for investment purposes ex. loans for college --> investment in human capital ex. firms borrowing to buy physical capital
if the interest rate increases, does the demand for loanable funds change? does the quantity demanded of loanable funds change?
if the interest rate increases ? if the interest rate decreases ?
if the interest rate increases, does the supply of loanable funds change? does the quantity supplied of loanable funds change?
if the interest rate increases, the quantity of loanable funds supplied (savings) increases if the interest rate decreases, the quantity of money saved decreases
insecure property rights
(explain how each of the following affects the quantity of savings and investment within an economy, and how they can ultimately affect long-run economic growth)
how do you compare the value of two different sums of money over time?
(for example, how do you determine whether you should accept $10 today or $11 one year from today?)
how does a change in the demand for loanable funds affect the quantity of savings/borrowing and the equilibrium interest rate?
(give an example of something that would increase/decrease the demand of loanable funds) if something happens that will give the borrower the incentive to borrow more money at each interest rate, there will be an increase in demand ex. Congress passes investment tax credit - will shift demand curve up and to the right - equilibrium interest rate shifts up - stimulates the economy to grow because of this; savings and investment increase decrease in demand ex.
how does a change in the supply of loanable funds affect the quantity of savings/borrowing and the equilibrium interest rate?
(give an example of something that would increase/decrease the supply of loanable funds) anything that will affect your incentive to save will shift the supply curve ex. decrease in tax on savings ex. decrease in life expectancy decrease in supply ex. Congress increases tax rate on savings income - shifts supply curve to the left - raises equilibrium interest rate - causes economy to contract because there is a shortage; investment and savings decrease
crowding out
occurs when governments find themselves without sufficient tax revenues to fund all the spending that it has planned by borrowing more money and driving up interest rates, it is crowding out investment and consumption - specifically related to a decrease in private investment spending funded by borrowing
why is the demand for loanable funds downward sloping? who demands loanable funds? what is the cost of borrowing in the loanable funds market?
the demand for loanable funds is downward sloping because interest rate decreases the demand for loanable funds borrowers demand loanable funds the cost of borrowing in the loanable funds market is the interest rate
what is the price of saving and borrowing?
the price of saving: the price the saver receives when they loan $ to another the price of borrowing: interest rate
why is the supply of loanable funds upward sloping? who supplies loanable funds? what is the price received for providing loanable funds?
the supply of loanable funds is upward sloping because the interest rate increases the quantity of loanable funds supplied savers (lenders) supply loanable funds the price received for providing loanable funds is
why do people save money?
to put off current consumption for future consumption - they are looking for someone who would borrow their money and then give them some sort of rate of return (interest)
What is the role of the financial system?
transfer resources from savers to borrowers, increases economic efficiency
how does government borrowing affect the demand for loanable funds?
when the government borrows, it can lead to a decrease in the supply of loanable funds available for private borrowing, which can lead to an increase in the interest rate - if interest rates increase, private orgs. will be less willing to borrow $ to finance their investments, causing investment to decrease