1. Interest Rates, Saving, Investing, & Economic Growth
Financial Systems
Interest Rates, Saving, Investing,
& Economic Growth

2. Financial Institutions
Intermediaries that help channel savings to economic investment
This affects a nation’s rate of economic growth, because the investments affect a nation’s capacity to produce goods and services in the future

3. Interest Rate Interest Rate
The price borrowers pay to borrow money and the price lenders receive for lending money
Prime rate – the interest rate lenders charge their best customers
Large corporations and other businesses that borrow significant amounts of money
The less confidence lenders have that they will be repaid, the higher the interest rate
The higher interest rate protects the lender against the risk of loss that results when some borrowers fail to repay
If a borrower secures a loan with collateral (i.e. a house or car loan), the interest rate will be lower

4. Interest Rate
Why is the interest rate on a savings account less than the interest rate on a 1 year CD?
When a saver buys a certificate of deposit, they are required to leave the money in the account for the designated period of time or pay a penalty
Higher interest rates are the incentive for agreeing to keep the money in the account for the designated time period
Longer time commitment = higher interest rate
Protects savers from inflation risk

5. Nominal vs Real Nominal interest rate (i) – the interest rate paid
Real interest rate (r) – the interest rate paid after accounting for inflation
r = i – inflation rate

6. The Loanable Funds Market
Shows the relationship between the real interest rate (r) and the Quantity of Loanable Funds
Who supplies loanable funds?
Supply is made up of savers/lenders
Who demands loanable funds?
Demand is made up of borrowers

7. Saving Not consuming all current income Why do people save?
Does anyone benefit other than the savers?

8. In economics, a distinction is made between saving and investment
Economic Investment entails the production of capital goods
Personal investments are made when individuals buy financial securities, such as stocks and bonds (this is considered saving)

9. Capital Physical Capital (Capital goods) Human Capital Factories
Machines
Tools
Inventories
Human Capital
Quality of labor resources

10. Economic Growth
Economic growth is a sustained rise in a nation’s production of goods and services
The primary means by which market economies reduce poverty and raise standards of living
Several factors:
Capital formation
Human capital
Technological change
Improved institutional arrangements

11. Technological Change
The introduction of new methods of production or new products intended to increase the productivity of existing inputs
The result of research and development (R & D)