Ch 25 Saving, Investment and the Financial System

*p review of financial terms learned in Micro stock market lessons

I. Saving and Investments in the National Income Accounts *assume a closed economy for now Y = C+I+G (Income = Expenditures) Subtract Consumption and Government from both sides Y-C-G = I Y-C-G : tells us our income (Y) after we paid for C and G….so this is National Savings (S) …..so Y-C-G = I ……= ……S = I *think back to AE model ….at Equilibrium, S = I …so National Savings = …. S = Y-C-G

If S = I : how is this coordinated in the economy????? THE FINANCIAL SYSTEM TAKES IN A NATION’S SAVINGS AND DIRECTS IT TO THE NATION’S INVESTMENTS (p.563)

National Savings is separated into Private and Public *must consider taxes Private Income (Y) must subtract private Taxes (T) and private Consumption ( C ) ….so Private Savings = Y-T-C Public Income consists of Tax revenue (T) and subtract Government spending (G) …so Public Savings = T-G National Savings = Private Savings + Public Savings S = ( Y-T-C) + (T-G)

II. Meaning of Saving and Investment ***specific use of terms***

III. Market For Loanable Funds Supply Curve: The Supply of What? ? ? Demand Curve: The Demand of What?

Supply =  Savings ….comes from …. People have extra income and lend it out Examples… Savings accounts, buy bonds

Demand= Investment….comes from.. Households and firms want to borrow to invest Examples… Home mortgages, firms buy new equipment, factories

Interest Rates = price of borrowing High int rates = Borrowing is…. more expensive = D falls = Downward sloping

High interest rates = Savings is…. More incentive = S increases = Upward sloping

Examine Govt. policies that affect SAVING (S) AND INVESTMENT (D) Three steps: 1. Shift S or D 2. Direction of shift 3. Evaluate new equilibrium