Macro Ch. 13

The slope of the demand curve

A fall in the interest rate reduces the cost of borrowing, which increases the quantity of loanable funds demanded

Assume: only one financial market

All savers deposit their saving in this market. All borrowers take out loans from this market. There is one interest rate, which is both the return to saving and the cost of borrowing.

The slope of the supply curve

An increase in the interest rate makes saving more attractive, which increases the quantity of

The supply of loanable funds comes from saving:

Households with extra income can loan it out and earn interest. Public saving, if positive, adds to national saving and the supply of loanable funds. If negative, it reduces national saving and the supply of loanable funds.

Public Saving

Tax revenue less government spending =T-G

Crowding Out

The govt borrows to finance its deficit, leaving less funds available for investment.

Private Saving

The portion of households' income that is not used for consumption or paying taxes =Y-T-C

Budget Deficit

a shortfall of tax revenue from govt spending Taxes<Government Spending = T - G public saving (negative -)

Budget Surplus

an excess of tax revenue over govt spending Taxes>Government Spending = T - G public saving (positive +)

Mutual Funds

institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds

Financial Markets

institutions through which savers can directly provide funds to borrowers. Examples:

Financial Intermediaries

institutions through which savers can indirectly provide funds to borrowers. Examples: Banks

Bond

is a certificate of indebtedness.

Stock

is a claim to partial ownership in a firm.

Private Saving

is the income remaining after households pay their taxes and pay for consumption.

Investment

is the purchase of new capital.

National Saving

private saving + public saving = (Y-T-C) + (T-G) = Y-C-G = the portion of national income that is not used for consumption or government purchases

Financial System

the group of institutions that helps match the saving of one person with the investment of another.

Ch. 13 Summary

• The U.S. financial system is made up of many types of financial institutions, like the stock and bond markets, banks, and mutual funds. • National saving equals private saving plus public saving. • In a closed economy, national saving equals investment. The financial system makes this happen. • The supply of loanable funds comes from saving. The demand for funds comes from investment. The interest rate adjusts to balance supply and demand in the loanable funds market. • A government budget deficit is negative public saving, so it reduces national saving, the supply of funds available to finance investment. • When a budget deficit crowds out investment, it reduces the growth of productivity and GDP.

US Government Debt

The government finances deficits by borrowing (selling government bonds). Persistent deficits lead to a rising govt debt. The ratio of govt debt to GDP is a useful measure of the government's indebtedness relative to its ability to raise tax revenue. Historically, the debt-GDP ratio usually rises during wartime and falls during peacetime—until the early 1980s.

Investment Incentives

An investment tax credit increases the demand for L.F. Interest Rate ...which raises the eq'm interest rate and increases the eq'm quantity of

Saving Incentives

Tax incentives for saving increase the supply of L.F. Interest Rate ...which reduces the eq'm interest rate and increases the

The demand for loanable songs comes from investment

Firms borrow the funds they need to pay for new equipment, factories, etc. Households borrow the funds they need to purchase new houses.