Savings, Investment, and Finance, Econ Chapter 13

Institutions that help to match one person’s saving with another person’s investment are collectively called the financial system
Given that Monika’s income exceeds her expenditures, Monika is best described as a saver or as a supplier of funds
Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else, their consumption expenditures are being financed by someone else’s saving
At the broadest level, the financial system moves the economy’s scarce resources from savers to borrowers
The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called credit risk
As an alternative to selling shares of stock as a means of raising funds, a large company could, instead sell bonds
Two of the economy’s most important financial intermediaries are banks and mutual funds
A bond is a certificate of indebtedness
If the government’s expenditures exceeded its receipts, it would likely sell bonds directly to the public
The sell of bonds to raise money is called debt finance, while the sale of stocks to raise funds is called equity finance
What makes the interest rate on a bond higher than normal? both high credit risk and long time
As chief financial officer you sell newly issued bonds on behalf of your firm. Your firm is borrowing directly
financial system institutions that match one person’s savings with another person’s invesments
savers and borrowers people who lend money, people who need to borrow
2 categories of financial institutions financial markets and financial intermediaries
financial markets institutions where one who wants to save can directly supply money to those who want to borrow. ex: bond markets and stock markets
bond an iou that specifies the indebtness of a borrower to a supplier. has a date of maturity when it must be paid with interest
3 characteristics of a bond term: length of time until it matures. credit risk: probability borrower will fail to pay. tax treatment: the way tax laws affect one’s bond
perpetuity bond that never matures
default when a borrower fails to pay a bond
junk bond high credit risks meaning they may never be paid. have very high interest rates to make up for that
municipal bonds state/local government bonds where buyers don’t pay an income tax. low interest rates
stocks claim to partial ownership and profit of a firm. stocks are sold separately outside of business in stock exchanges
equity finance sale of a stock for money
debt finance sale of bonds for money
stock index average of a group of stock prices. show buyers what’s good and what’s not
financial intermediaries institutions where savers directly provide funds to borrowers
banks take deposits from savers and use that money to provide loans to borrowers. the interest they pay tos savers is lower than the interest they demand form borrowers so that they can make money
mediums of exchange debit cards, checks, etc that are used to engage in transactions
mutual funds institutions that sell shares to the public and buy portfolios of stocks and bonds. decrease risk of shareholders because their money is invested in multiple companies
index funds mutual funds that buy all stocks of a given stock index
3 key numbers of following a stock price: interest rate, dividend: profits paid to shareholders by companies, price-earnings ratio: price of stock/amount earned per share in the last year (higher p/e means an expensive stock)
6 elements of financial crisis large decline in prices, insolvencies, decline in confidence, credit crunch, economic downtown, vicious circles
accounting how various numbers are defined and added
nation saving total income of economy that remains after taking out consumption and government purchases. s=i, s=y-c-g-nx
saving must equal investment
private saving amount households have left after paying taxes and consumption
public saving amount government has left after paying for its spending
saving is money towards _____, investment is money towards _______ banks, capital
market for loanable funds hypothetical situation where all savers and borrowers deal with their money in the same market. saving is the supply of the market, investment is the demand of the market
supply and demand curve of market for loanable funds demand is downward because people don’t borrow when interest rates are high. supply is upward because people loan money when interest is high
3 steps of analyzing policies is the shift in supply or demand? which way is the shift? how is equilibrium affected
policy 1: saving incentives reform taxes so that it isn’t as expensive to save. supply increases, shifts to right: greater saving, lower interest rates, greater investment
policy 2: investment incentives investment tax credit that gives firms tax advantage when they’re building new factories or buying equipment. increases demand, shifts to the right: greater investment, interest rates, and saving
policy 3: government budget deficits government debt results when gov. borrows money from bonds to relieve defecits. causes a decrease in supply, shift to the left: lower interest rates, lower investment
policy 3: government budget surplus increase in supply, shift to the right: reduces interest rates, encourages investment
interest rates are equal to the price of loanable funds
crowding out decrease in investment because of government borrowing
at the broadest level the financial system moves economy’s scarce resources from savers to borrowers

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