Ch26-Saving--Investment--and-the-Financial-System

1-0Chapter25Saving,Investment,andtheFinancialSystemMacro-economicsPRINCIPLESOFN.GregoryMankiwInthischapter,lookfortheanswerstothesequestions:WhatarethemaintypesoffinancialinstitutionsintheU.S.economy,andwhatistheirfunction?Whatarethethreekindsofsaving?What’sthedifferencebetweensavingandinvestment?Howdoesthefinancialsystemcoordinatesavingandinvestment?Howdogovtpoliciesaffectsaving,investment,andtheinterestrate?11-2FinancialInstitutionsThefinancialsystem:thegroupofinstitutionsthathelpsmatchthesavingofonepersonwiththeinvestmentofanother.Financialmarkets:institutionsthroughwhichsaverscandirectlyprovidefundstoborrowers.Examples:TheBondMarket.Abondisacertificateofindebtedness.TheStockMarket.Astockisaclaimtopartialownershipinafirm.SAVING,INVESTMENT,ANDTHEFINANCIALSYSTEM21-3FinancialInstitutionsFinancialintermediaries:institutionsthroughwhichsaverscanindirectlyprovidefundstoborrowers.Examples:BanksMutualfunds–institutionsthatsellsharestothepublicandusetheproceedstobuyportfoliosofstocksandbondsSAVING,INVESTMENT,ANDTHEFINANCIALSYSTEM31-4DifferentKindsofSavingPrivatesaving=Theportionofhouseholds’incomethatisnotusedforconsumptionorpayingtaxes=Y–T–CPublicsaving=Taxrevenuelessgovernmentspending=T–GSAVING,INVESTMENT,ANDTHEFINANCIALSYSTEM41-5NationalSavingNationalsaving=privatesaving+publicsaving=(Y–T–C)+(T–G)=Y–C–G=theportionofnationalincomethatisnotusedforconsumptionorgovernmentpurchasesSAVING,INVESTMENT,ANDTHEFINANCIALSYSTEM51-6SavingandInvestmentRecallthenationalincomeaccountingidentity:Y=C+I+G+NXFortherestofthischapter,focusontheclosedeconomycase:Y=C+I+GSolveforI:SAVING,INVESTMENT,ANDTHEFINANCIALSYSTEM6I=Y–C–G=(Y–T–C)+(T–G)Saving=investmentinaclosedeconomynationalsaving1-7BudgetDeficitsandSurplusesBudgetsurplus=anexcessoftaxrevenueovergovtspending=T–G=publicsavingBudgetdeficit=ashortfalloftaxrevenuefromgovtspending=G–T=–(publicsaving)SAVING,INVESTMENT,ANDTHEFINANCIALSYSTEM7ACTIVELEARNING1A.CalculationsSupposeGDPequals$10trillion,consumptionequals$6.5trillion,thegovernmentspends$2trillionandhasabudgetdeficitof$300billion.Findpublicsaving,taxes,privatesaving,nationalsaving,andinvestment.8ACTIVELEARNING1Answers,partAGiven:Y=10.0,C=6.5,G=2.0,G–T=0.3Publicsaving=T–G=–0.3Taxes:T=G–0.3=1.7Privatesaving=Y–T–C=10–1.7–6.5=1.8Nationalsaving=Y–C–G=10–6.5–2=1.5Investment=nationalsaving=1.59ACTIVELEARNING1B.HowataxcutaffectssavingUsethenumbersfromtheprecedingexercise,butsupposenowthatthegovernmentcutstaxesby$200billion.Ineachofthefollowingtwoscenarios,determinewhathappenstopublicsaving,privatesaving,nationalsaving,andinvestment.1.Consumerssavethefullproceedsofthetaxcut.2.Consumerssave1/4ofthetaxcutandspendtheother3/4.10ACTIVELEARNING1Answers,partBInbothscenarios,publicsavingfallsby$200billion,andthebudgetdeficitrisesfrom$300billionto$500billion.1.Ifconsumerssavethefull$200billion,nationalsavingisunchanged,soinvestmentisunchanged.2.Ifconsumerssave$50billionandspend$150billion,thennationalsavingandinvestmenteachfallby$150billion.11ACTIVELEARNING1C.DiscussionquestionsThetwoscenariosfromthisexercisewere:1.Consumerssavethefullproceedsofthetaxcut.2.Consumerssave1/4ofthetaxcutandspendtheother3/4.Whichofthesetwoscenariosdoyouthinkismorerealistic?Whyisthisquestionimportant?121-13TheMeaningofSavingandInvestmentPrivatesavingistheincomeremainingafterhouseholdspaytheirtaxesandpayforconsumption.Examplesofwhathouseholdsdowithsaving:BuycorporatebondsorequitiesPurchaseacertificateofdepositatthebankBuysharesofamutualfundLetaccumulateinsavingorcheckingaccountsSAVING,INVESTMENT,ANDTHEFINANCIALSYSTEM131-14TheMeaningofSavingandInvestmentInvestmentisthepurchaseofnewcapital.Examplesofinvestment:GeneralMotorsspends$250milliontobuildanewfactoryinFlint,Michigan.Youbuy$5000worthofcomputerequipmentforyourbusiness.Yourparentsspend$300,000tohaveanewhousebuilt.SAVING,INVESTMENT,ANDTHEFINANCIALSYSTEM14Remember:Ineconomics,investmentisNOTthepurchaseofstocksandbonds!1-15TheMarketforLoanableFundsAsupply-demandmodelofthefinancialsystemHelpsusunderstandhowthefinancialsystemcoordinatessaving&investmenthowgovtpoliciesandotherfactorsaffectsaving,investment,theinterestrateSAVING,INVESTMENT,ANDTHEFINANCIALSYSTEM151-16TheMarketforLoanableFundsAssume:onlyonefinancialmarketAllsaversdeposittheirsavinginthismarket.Allborrowerstakeoutloansfromthismarket.Thereisoneinterestrate,whichisboththereturntosavingandthecostofborrowing.SAVING,INVESTMENT,ANDTHEFINANCIALSYSTEM161-17TheMarketforLoanableFundsThesupplyofloanablefundscomesfromsaving:Householdswithextraincomecanloanitoutandearninterest.Publicsaving,ifpositive,addstonationalsavingandthesupplyofloanablefunds.Ifnegative,itreducesnationalsavingandthesupplyofloanablefunds.SAVING,INVESTMENT,ANDTHEFINANCIALSYSTEM171-18TheSlopeoftheSupplyCurveSAVING,INVESTMENT,ANDTHEFINANCIALSYSTEM18InterestRateLoanableFunds($billions)SupplyAnincreaseintheinterestratemakessavingmoreattractive,whichincreasesthequantityofloanablefundssupplied.603%806%1-19TheMarketforLoanableFundsSAVING,INVESTMENT,ANDTHEFINANCIALSYSTEM19