Saving, Investment, and the Financial System
|
|
- Randolf Norton
- 6 years ago
- Views:
Transcription
1 Chapter 9 MODERN PRINCIPLES OF ECONOMICS Third Edition Saving, Investment, and the Financial System
2 Outline The Supply of Savings The Demand to Borrow Equilibrium in the Market for Loanable Funds The Role of Intermediaries: Banks, Bonds, and Stock Markets What Happens When Intermediation Fails? The Financial Crisis of : Leverage, Securitization, and Shadow Banking 2
3 Introduction Savings are necessary for capital accumulation. The more capital an economy can invest, the greater is GDP per capita. Connecting savers and borrowers increases the gains from trade and smoothens economic growth. 3
4 Definition Saving: Income that is not spent on consumption goods. Investment: The purchase of new capital goods. 4
5 Supply of Savings Four of the major factors that determine the supply of savings: Smoothing consumption. Impatience. Marketing and psychological factors. Interest rates. 5
6 Smoothing Consumption If you consume what you earn every year, consumption is high during your working years. After retirement consumption drops precipitously. You can smooth your consumption by saving during the working years and dissaving during the retirement years. Saving also builds a cushion for unemployment or unexpected health problems. 6
7 Smoothing Consumption 7
8 Impatience Most individuals prefer to consume now rather than later. The more impatient a person, the more likely that person s savings rate will be low. Impatience is reflected in any economic situation where people must compare costs and benefits over time. Criminals, addicts, alcoholics, and smokers all tend to discount the future more heavily. 8
9 Definition Time preference: The desire to have goods and services sooner rather than later (all else being equal). 9
10 Marketing and Psychological Factors Individuals save more if saving is presented as the natural or default alternative. The retirement savings plan participation rate was 25% higher in businesses that used automatic enrollment rather than opt in. The default also mattered for how much was saved. Simple psychological changes, combined with marketing, can change how much people save. 10
11 The Interest Rate Interest rate Supply of savings 10% 5% The higher the interest rate, the greater the quantity saved $200 $280 Savings (billions of dollars) 11
12 Self-Check Which of the following is a major factor in determining the supply of savings? a. GDP. b. Patience. c. Investment. Answer: b patience is one of the major factors, along with consumption smoothing, interest rates, and marketing and psychological factors. 12
13 The Demand to Borrow One reason people borrow is to smooth consumption. Many young people borrow to invest in their education. Borrowing moves some sacrifices into future periods when students income is higher. By borrowing, saving, and dissaving, workers can smooth their consumption over their lifetime. 13
14 The Demand to Borrow The lifecycle theory of savings puts the demand to borrow and save together. 14
15 The Demand to Borrow Businesses borrow to finance large projects. Often the people with the best business ideas are not the people with the most savings. Example: Fred Smith and FedEx Many ventures cannot start small The ability to borrow greatly increases the ability to invest. Higher investment increases the standard of living and the rate of economic growth. 15
16 The Demand to Borrow Interest Rates Determines the cost of the loan An investment will be profitable only if its rate of return is greater than the interest rate. The higher the interest rate, the smaller the quantity demanded of savings will be: There are fewer investments that make the cut of yielding a higher return than it costs to borrow the funds to finance the project 16
17 The Demand to Borrow 17
18 Definition Market for loanable funds: Occurs when suppliers of loanable funds (savers) trade with demanders of loanable funds (borrowers). Trading in the market for loanable funds determines the equilibrium interest rate. 18
19 Equilibrium in Loanable Funds In equilibrium, the quantity of funds supplied equals the quantity of funds demanded. The interest rate adjusts to equalize savings and borrowing. If the interest rate is higher than equilibrium, the quantity of savings supplied > the quantity of savings demanded, creating a surplus. With a surplus of savings, suppliers will bid the interest rate down as they compete to lend. 19
20 Equilibrium in Loanable Funds Interest rate Supply of savings Equilibrium interest rate 8% Demand to borrow $250 Equilibrium quantity of savings/borrowing Savings/borrowing (in billions of dollars) 20
21 Equilibrium in Loanable Funds Interest rate Supply of savings 10% 8% Surplus Demand to borrow $190 $250 $280 Savings/borrowing (in billions of dollars) 21
22 Equilibrium in Loanable Funds Interest rate Supply of savings 10% 8% 6% Shortage Demand to borrow $200 $250 $300 Savings/borrowing (in billions of dollars) 22
23 Self-Check If there is a shortage of loanable funds, the interest rate will: a. Increase. b. Decrease. c. Stay the same. Answer: a increase; if there is a shortage, borrowers will bid the rate up. 23
24 Shifts in Supply and Demand Changes in economic conditions will shift the supply or demand curve. The shift will change the equilibrium interest rate and quantity of savings. Example: If the stock market crashes, people save more to restore their wealth 24
25 People Become More Thrifty Interest rate 8% 5% Lower interest rate Supply of savings New supply of savings Demand to borrow $250 $300 Greater savings and borrowing Savings/borrowing (in billions of dollars) 25
26 Shifts in Supply and Demand Example: Investors become more pessimistic during a recession and reduce their borrowing 26
27 Investors Become Less Optimistic Interest rate Supply of savings 8% Lower interest rate 5% $200 $250 Lower savings and borrowing Demand to borrow New demand to borrow Savings/borrowing (in billions of dollars) 27
28 Definition Financial intermediaries: Such as banks, bond markets, and stock markets reduce the costs of moving savings from savers to borrowers and investors. 28
29 The Role of Intermediaries Equilibrium in the market for loanable funds does not come about automatically. Savers move their capital to find the highest returns. Entrepreneurs must find the right investments and the right loans. Financial intermediaries ( middlemen ) reduce the costs of moving savings from savers to borrowers and help mobilize savings toward productive uses. 29
30 Banks Banks receive savings from many individuals and pay them interest. They loan these funds to borrowers, charging them interest. Banks earn profit by charging more for their loans than they pay for the savings. They earn this money by providing services such as evaluating investments and spreading risk. 30
31 Banks It would be wasteful if every saver spent time evaluating the same business. Banks coordinate lenders and minimize information costs. By specializing in loan evaluation, banks are better able to decide which business ideas make sense. Banks spread default risk across many lenders. Banks also play a role in the payments system. 31
32 Self-Check The main function of financial intermediaries is to: a. Make capital investments. b. Provide investment advice. c. Mobilize savings towards productive uses. Answer: c financial intermediaries reduce the costs of moving savings to investors and mobilize the savings towards productive uses. 32
33 The Bond Market Investors can more easily find information about large, well-known corporations. Governments use bonds extensively as well They are therefore more willing to bypass banks and lend to these companies directly. A corporation acknowledges its debt to a member of the public by issuing a bond, or corporate IOU. The bond contract lists how much is owed, the rate of interest, and when payment is due. 33
34 The Bond Market Bonds are a way to raise a large sum of money for long-lived assets, and pay it back over a long period of time. All bonds involve default risk, or the risk that the borrower will not pay back the loan. A risky company has to pay higher interest to compensate lenders for a greater risk of default. Interest rates differ depending on the borrower, repayment time, amount of the loan, type of collateral, and many other features. 34
35 The Bond Market Major issues are graded by rating companies: Standard and Poor s Moody s Grades range from lowest risk (AAA) bonds in current default (D) The higher the risk the greater the interest rate required to get lenders to buy the bonds. 35
36 Definition Collateral: Something of value that by agreement becomes the property of the lender if the borrower defaults. 36
37 U.S. Government Bonds Treasury securities are desirable because they are easy to buy and sell and the U.S. government is unlikely to default. T-bonds 30-year bonds; pay interest every 6 months. T-notes maturities ranging from 2 to 10 years; pay interest every 6 months. T-bills maturities of a few days to 26 weeks; pay only at maturity. Zero-coupon bonds pay only at maturity. 37
38 Self-Check Something of value that becomes the property of the lender if the borrower defaults is called: a. Collateral. b. Interest. c. A bond. Answer: a this is called collateral. 38
39 Definition Crowding out: The decrease in private consumption and investment that occurs when government borrows more. 39
40 The Bond Market Interest rate Government borrows $100b Supply of savings 9% c b 7% a Private demand Private +$100b govt. demand $150 $200 $250 Savings/borrowing An increase in government borrowing crowds out private consumption and investment. 40
41 The Bond Market Interest rate Supply of savings 9% 7% c a b The higher interest rate draws forth more savings; private consumption falls. Private demand Private +$100b govt. demand $150 $200 $250 Savings/borrowing An increase in government borrowing crowds out private consumption and investment. 41
42 The Bond Market Interest rate Supply of savings 9% 7% c a b The higher interest rate also reduces the demand to borrow and invest. Private demand Private +$100b govt. demand $150 $200 $250 Savings/borrowing An increase in government borrowing crowds out private consumption and investment. 42
43 Bond Prices and Interest Rates The value of a bond at maturity is called the face value (FV). The rate of return, or implied interest rate, on a zero-coupon bond can be calculated as: FV - Price Rate of return = 100 Price If you pay $909 for a 1-year bond with a face value of $1,000: Rate of return = 100 = 10%
44 Bond Prices and Interest Rates Equally risky assets must have the same rate of return. If they didn t, no one would buy the asset with the lower rate of return. The price would fall until the rate of return was competitive with other investments. This is called an arbitrage principle. 44
45 Definition Arbitrage: The buying and selling of equally risky assets; arbitrage ensures that equally risky assets earn equal returns. 45
46 Bond Prices and Interest Rates Interest rates and bond prices move in opposite directions. When interest rates go up, bond prices fall; when interest rates go down, bond prices rise. This tells us that in addition to default risk, people who buy bonds also face interest rate risk. 46
47 Bond Prices and Interest Rates Assume a long term bond that pays $50/year Assuming all other factors are constant: If the prevailing interest rate were 10%, what would you pay to own the bond? If interest rates fell to 5%, what would you pay to own the bond? As interest rates fall, the market value of the bond rises, and vice-versa What happens when interest rates are zero? Bond market Stock market 47
48 Self-Check The risk that a borrower will not pay the loan back is called: a. Default risk. b. Interest rate risk. c. Crowding out. Answer: a this is called default risk. 48
49 Definition Stock: or a share is a certificate of ownership in a corporation. (equity) Initial public offering (IPO): The first time a corporation sells stock to the public in order to raise capital. 49
50 The Stock Market Businesses can fund their activities by issuing stock, or shares of ownership. Stocks are traded on organized markets called stock exchanges. Stock markets encourage investment and growth. Buying and selling existing shares of stock does not increase net investment in the economy. When a firm sells new shares to the public (IPO), the proceeds often fund investment. 50
51 When Intermediation Fails The bridge between savers and borrowers can be broken in many ways. 51
52 Insecure Property Rights Some governments do not offer secure property rights to savers. Savings may be confiscated, frozen, or subject to other restrictions. When Argentina froze bank accounts in 2001, many banks went under and Argentinians lost their savings. Russia has at times confiscated or restricted the value of shareholders holdings. This negatively affects savings and investment. 52
53 Controls on Interest Rates Price controls on interest rates also cause the loanable funds market to malfunction. Usury laws impose a maximum ceiling on the interest rate that can be charged on a loan. Most U.S. states have usury laws, although often they have loopholes: they don t stop most credit card borrowing. they are set at levels too high to influence most loan markets. Credit card loan sharking at 29.99% 53
54 Controls on Interest Rates Interest rate 8% Controlled Interest rate Market Equilibrium Shortage Supply 1. Shortage of savings 2. Less savings and investment 3. Slower economic growth Demand $190 $250 $300 Savings/borrowing A Ceiling on Interest Rates Creates a Shortage of Savings
55 Politicized Lending In many countries, most large banks are owned by the government. Government-owned banks are useful for directing capital to political supporters. One study found that the larger the fraction of government-owned banks a country had in 1970, the slower the growth in per capita GDP and productivity over the next several decades. In the US, Countrywide Mortgage Company made many sweetheart loans to Congress 55
56 Bank Failures and Panics At the onset of America s Great Depression between 1929 and 1933, almost half of all U.S. banks failed. Many people lost their life savings. Spending decreased, which meant that many businesses lost their customers and revenue. Businesses were unable to get loans or daily working capital and therefore failed. It took many years before the American economy recovered. 56
57 The Financial Crisis of Leading up to the crisis, Americans borrowed more than ever. The borrowing was centered in the housing and banking sectors. In the 1990s and 2000s, lenders became convinced that house prices were unlikely to fall. They became willing to lend with much lower down payments. At the height of the housing boom in 2006, 17% RG1 of mortgages were made with 0% down. 57
58 Slide 57 RG1 Adding a word: The word "Payment" may be added in the point, to make it more specific. Renuka Garg, 5/11/2015
59 Definition Owner equity: The value of the asset minus the debt, or E = V D. Leverage ratio: The ratio of debt to equity, or D/E. 58
60 The Financial Crisis of Leverage A house worth $400,000 with 20% down and a mortgage of $320,000: Equity = $400,000 - $320,000 = $80,000 Leverage ratio = $320,000 / $80,000 = 4 A house worth $400,000 with 10% down and a mortgage of $360,000: Equity = $400,000 - $360,000 = $40,000 Leverage ratio = $360,000 / $40,000 = 9 59
61 The Financial Crisis of Securitization The seller of a securitized asset gets cash. The buyer gets a stream of future payments. Mortgage loans were securitized, or bundled together and sold as financial assets. Bad loans were dumped on unsuspecting investors around the world. 60
62 The Financial Crisis of Securitization Housing prices started to fall in Many owners owed more on their mortgage than their house was worth. Delinquency and foreclosure rates more than doubled. Many banks and financial intermediaries ended up with loans and assets of questionable value. 61
63 The Financial Crisis of Shadow Banking Traditional banks fund themselves largely through deposits. These deposits are insured by the Federal Deposit Insurance Corporation (FDIC). Shadow banking includes investment banks, hedge funds, money market funds, and others. Investment banks are funded by investors and are not insured by the FDIC. 62
64 The Financial Crisis of The shadow banking system is less heavily regulated and monitored than traditional banks. For years, regulators and policymakers were unaware of its importance. OLI SCARFF/GETTY IMAGES Lehman Brothers declared bankruptcy in At its peak in 2008 the shadow banking system lent $20 trillion, considerably more than did traditional banks. 63
65 The Financial Crisis of The Crisis As house prices fell, highly leveraged home owners defaulted on their mortgages. Highly leveraged banks were pushed towards insolvency. It wasn t always clear who owned what or who faced the worst losses. Investors became unwilling to extend short-term funding to shadow banks. Credit markets froze up - WAFD ("We're all freaking doomed.") 64
66 The Financial Crisis of The government has taken steps to avoid this happening again. After the Lehman Brothers failure, the Federal Reserve took over AIG when it was failing and guaranteed its debts. New financial regulations are bringing the shadow banking system out of the shadows. Banks of all kinds are required to hold more equity, reducing the amount of their leverage. 65
67 Self-Check Banks that are funded by investors and are not insured by the FDIC are called: a. Traditional banks. b. Commercial banks. c. Shadow banks. Answer: c shadow banks. 66
68 Takeaway Saving and borrowing allow individuals, firms, and governments to smooth their consumption over time. Financial intermediaries bridge the gap between savers and borrowers. Financial intermediaries also collect savings, evaluate investments, diversify risk, and help finance new and innovative ideas. 67
69 Takeaway Insecure property rights, inflation, politicized lending, and bank failures and panics can all contribute to the breakdown of financial intermediation. The crisis was brought about by high leverage and falling asset prices that created a panic and sharply reduced the amount of lending in the economy. 68
FINANCE, SAVING, AND INVESTMENT
24 FINANCE, SAVING, AND INVESTMENT During September 2008: The U.S. government took over the risky debts of Fannie Mae and Freddie Mac. The New York Fed, the U.S. Treasury, and Bank of America tried to
More informationChapter 10. The Great Recession: A First Look. (1) Spike in oil prices. (2) Collapse of house prices. (2) Collapse in house prices
Discussion sections this week will meet tonight (Tuesday Jan 17) to review Problem Set 1 in Pepper Canyon Hall 106 5:00-5:50 for 11:00 class 6:00-6:50 for 1:30 class Course web page: http://econweb.ucsd.edu/~jhamilto/econ110b.html
More informationMODERN PRINCIPLES: MACROECONOMICS. Tyler Cowen George Mason University. Alex Tabarrok George Mason University. Worth Publishers
MODERN PRINCIPLES: MACROECONOMICS Tyler Cowen George Mason University Alex Tabarrok George Mason University Worth Publishers CONTENTS Preface xv CHAPTER 1 The Big Ideas 1 Big Idea One: Incentives Matter
More informationThe Financial System. Sherif Khalifa. Sherif Khalifa () The Financial System 1 / 52
The Financial System Sherif Khalifa Sherif Khalifa () The Financial System 1 / 52 Financial System Definition The financial system consists of those institutions in the economy that matches saving with
More informationChapter 7. SAVING, INVESTMENT and FINIANCE. Income not spent is saved. Where do those dollars go?
Chapter 7 SAVING, INVESTMENT and FINIANCE Income not spent is saved. Where do those dollars go? Describe financial markets. Explain how financial markets channel saving to investment. Explain how government
More informationThe Financial System. Sherif Khalifa. Sherif Khalifa () The Financial System 1 / 55
The Financial System Sherif Khalifa Sherif Khalifa () The Financial System 1 / 55 The financial system consists of those institutions in the economy that matches saving with investment. The financial system
More informationb. Financial innovation and/or financial liberalization (the elimination of restrictions on financial markets) can cause financial firms to go on a
Financial Crises This lecture begins by examining the features of a financial crisis. It then describes the causes and consequences of the 2008 financial crisis and the resulting changes in financial regulations.
More informationChapter 7. SAVING, INVESTMENT and FINIANCE. Income not spent is saved. Where do those dollars go?
Chapter 7 SAVING, INVESTMENT and FINIANCE Income not spent is saved. Where do those dollars go? Describe financial markets Explain how financial markets channel saving to investment Explain how governments
More information2015 Pearson. Why have interest rates been so low?
Why have interest rates been so low? Finance, Saving, and Investment 26 When you have completed your study of this chapter, you will be able to CHAPTER CHECKLIST 1 Describe the financial markets and the
More informationIntroduction. Why study Financial Markets and Institutions? Primary versus Secondary Markets. Financial Markets
Why study Financial Markets and Institutions? Introduction Markets and institutions are primary channels to allocate capital in our society Proper capital allocation leads to growth in: Societal Wealth
More informationAND INVESTMENT * Chapt er. Key Concepts
Chapt er 7 FINANCE, SAVING, AND INVESTMENT * Key Concepts Financial Institutions and Financial Markets Finance and money are different: Finance refers to raising the funds used for investment in physical
More informationSaving, Investment, and the Financial System
Saving, Investment, and the Financial System The Financial System The financial system consists of institutions that help to match one person s saving with another person s investment. It moves the economy
More informationThis outline is based on Cowen and Tabarrok (2011). Saving income that is not spent on consumption goods
Chapter 9 Financial System This outline is based on Cowen and Tabarrok (2011). 9.1 Supply of Savings Saving income that is not spent on consumption goods Investment purchase of new capital goods (business
More informationFINANCE, SAVING, AND INVESTMENT
23 FINANCE, SAVING, AND INVESTMENT After studying this chapter, you will be able to: Describe the flows of funds through financial markets and the financial institutions Explain how borrowing and lending
More informationThe Financial Sector Functions of money Medium of exchange Measure of value Store of value Method of deferred payment
The Financial Sector Functions of money Medium of exchange - avoids the double coincidence of wants Measure of value - measures the relative values of different goods and services Store of value - kept
More informationChapter 9 Saving, Investment, and Interest Rates
Chapter 9 Saving, Investment, and Interest Rates Multiple Choice Questions Choose the one alternative that best completes the statement or answers the question. 1. According to the life-cycle theory of
More informationEcon 102 Exam 2 Name ID Section Number
Econ 102 Exam 2 Name ID Section Number 1. Suppose investment spending increases by $50 billion and as a result the equilibrium income increases by $200 billion. The investment multiplier is: A) 10. B)
More informationAnswers to Questions: Chapter 5
Answers to Questions: Chapter 5 1. Figure 5-1 on page 123 shows that the output gaps fell by about the same amounts in Japan and Europe as it did in the United States from 2007-09. This is evidence that
More informationOCR Economics A-level
OCR Economics A-level Macroeconomics Topic 3: Application of Policy Instruments 3.5 Approaches to policy and macroeconomic context Notes Explain why approaches to macroeconomic policy change in accordance
More informationEconomics Sixth Edition
N. Gregory Mankiw Principles of Economics Sixth Edition 26 Saving, Investment, and the Financial System Premium PowerPoint Slides by Ron Cronovich In this chapter, look for the answers to these questions:
More informationSAVING, INVESTMENT, AND THE FINANCIAL SYSTEM
13 SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM LEARNING OBJECTIVES: By the end of this chapter, students should understand: some of the important financial institutions in the U.S. economy. how the financial
More informationthe Federal Reserve System
CHAPTER 13 Money, Banks, and the Federal Reserve System Chapter Summary and Learning Objectives 13.1 What Is Money, and Why Do We Need It? (pages 422 425) Define money and discuss its four functions. A
More information10.2 Recent Shocks to the Macroeconomy Introduction. Housing Prices. Chapter 10 The Great Recession: A First Look
Chapter 10 The Great Recession: A First Look By Charles I. Jones Media Slides Created By Dave Brown Penn State University 10.2 Recent Shocks to the Macroeconomy What shocks to the macroeconomy have caused
More informationThe Financial System. FINANCIAL INSTITUTIONS IN THE U.S. ECONOMY Financial Markets Stock Market Bond Market
Chapter 26. Saving, Investment, and the Financial System important financial institutions in the U.S. economy. how the financial system is related to key macroeconomic variables. the model of the supply
More informationInternational Finance
International Finance FINA 5331 Lecture 2: U.S. Financial System William J. Crowder Ph.D. Financial Markets Financial markets are markets in which funds are transferred from people and Firms who have an
More informationINTEREST RATES Overview Real vs. Nominal Rate Equilibrium Rates Interest Rate Risk Reinvestment Risk Structure of the Yield Curve Monetary Policy
INTEREST RATES Overview Real vs. Nominal Rate Equilibrium Rates Interest Rate Risk Reinvestment Risk Structure of the Yield Curve Monetary Policy Some of the following material comes from a variety of
More informationChapter Fourteen. Chapter 10 Regulating the Financial System 5/6/2018. Financial Crisis
Chapter Fourteen Chapter 10 Regulating the Financial System Financial Crisis Disruptions to financial systems are frequent and widespread around the world. Why? Financial systems are fragile and vulnerable
More informationInflation and the Quantity Theory of Money
Chapter 12 MODERN PRINCIPLES OF ECONOMICS Third Edition Inflation and the Quantity Theory of Money Outline Defining and Measuring Inflation The Quantity Theory of Money The Costs of Inflation Why do governments
More informationLecture 7. Unemployment and Fiscal Policy
Lecture 7 Unemployment and Fiscal Policy The Multiplier Model As we ve seen spending on investment projects tends to cluster. What are the two reasons for this? 1. Firms may adopt a new technology at
More informationthe Federal Reserve System
CHAPTER 14 Money, Banks, and the Federal Reserve System Chapter Summary and Learning Objectives 14.1 What Is Money, and Why Do We Need It? (pages 456 459) Define money and discuss the four functions of
More informationSAVING, INVESTMENT, AND THE FINANCIAL SYSTEM
26 SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM WHAT S NEW IN THE FOURTH EDITION: There are no substantial changes to this chapter. LEARNING OBJECTIVES: By the end of this chapter, students should understand:
More informationChapter 16. MODERN PRINCIPLES OF ECONOMICS Third Edition
Chapter 16 MODERN PRINCIPLES OF ECONOMICS Third Edition Monetary Policy Outline Monetary Policy: The Best Case The Negative Real Shock Dilemma When the Fed Does Too Much 2 Introduction In this chapter,
More informationThe Lehman Shock Financial Disaster the Effects on Japan. found out an attractive and interesting article, which showed the world economic
1 The Lehman Shock Financial Disaster the Effects on Japan Introduction In the third cycle, I researched about Greece s financial crisis. In the research process, I found out an attractive and interesting
More informationCauses of the Great Depression
The Great Depression What caused the most severe economic crisis in American history? What impact did the Great Depression have on Americans? How did the federal government respond to the economic collapse
More informationPart III. Cycles and Growth:
Part III. Cycles and Growth: UMSL Max Gillman Max Gillman () AS-AD 1 / 56 AS-AD, Relative Prices & Business Cycles Facts: Nominal Prices are Not Real Prices Price of goods in nominal terms: eg. Consumer
More informationFebruary 03, Chapter 10 AD_AS_Business Cycle.notebook. Chapter 10: Economic Fluctuations Pages ,
Chapter 10: Economic Fluctuations Pages 261 284, 288 291 Aggregate Demand (AD) the relationship between general price level and total spending in the economy. Four components that make up total spending:
More informationFISCAL POLICY* Chapt er. Key Concepts
Chapt er 13 FISCAL POLICY* Key Concepts The Federal Budget The federal budget is an annual statement of the government s outlays and receipts. Using the federal budget to achieve macroeconomic objectives
More informationThe Financial System: Opportunities and Dangers
CHAPTER 20 : Opportunities and Dangers Modified for ECON 2204 by Bob Murphy 2016 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL LEARN: the functions a healthy financial system performs
More informationSaving, Investment, and the Financial System
7 Saving, Investment, and the Financial System The Financial System The financial system consists of the group of institutions in the economy that help to match one person s saving with another person
More informationMacroeconomics: Principles, Applications, and Tools
Macroeconomics: Principles, Applications, and Tools NINTH EDITION Chapter 11 The Income- Expenditure Model Learning Objectives 11.1 Discuss the income-expenditure model. 11.2 Identify the two key components
More informationFINANCIAL INSTRUMENTS (All asset classes)
YOUR INVESTMENT KNOWLEDGE AND EXPERIENCE KNOWLEDGE SHEETS FINANCIAL INSTRUMENTS (All asset classes) What are bonds? What are shares (also referred to as equities)? What are funds without capital protection?
More informationPreview PP542. International Capital Markets. Gains from Trade. International Capital Markets. The Three Types of International Transaction Trade
Preview PP542 International Capital Markets Gains from trade Portfolio diversification Players in the international capital markets Attainable policies with international capital markets Offshore banking
More informationTHE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND
21 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND LEARNING OBJECTIVES: By the end of this chapter, students should understand: the theory of liquidity preference as a short-run theory
More informationTest Yourself: Monetary Policy
Test Yourself: Monetary Policy The improvement of understanding is for two ends: first, our own increase of knowledge; second, to enable us to deliver that knowledge to others. John Locke What is the transaction
More informationCredit Market Imperfections, Credit Frictions and Financial Crises. Instructor: Dmytro Hryshko
Credit Market Imperfections, Credit Frictions and Financial Crises Instructor: Dmytro Hryshko 1 / 23 Outline Credit Market Imperfections and Consumption. Asymmetric Information and the Financial Crisis.
More informationThe Financial System. Sherif Khalifa. Sherif Khalifa () The Financial System 1 / 29
The Financial System Sherif Khalifa Sherif Khalifa () The Financial System 1 / 29 Investment in physical capital and human capital are essential for productivity. Saving and investment are key ingredients
More informationSaving, Investment and the Financial System (Chapter 26 in Mankiw & Taylor)
Saving, Investment and the Financial System (Chapter 26 in Mankiw & Taylor) We have seen that saving and investment are essential to long-run economic growth In this lecture we will see how the financial
More informationTHE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND
20 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND LEARNING OBJECTIVES: By the end of this chapter, students should understand: the theory of liquidity preference as a short-run theory
More information1. Under what condition will the nominal interest rate be equal to the real interest rate?
Practice Problems III EC 102.03 Questions 1. Under what condition will the nominal interest rate be equal to the real interest rate? Real interest rate, or r, is equal to i π where i is the nominal interest
More informationSticky Wages and Prices: Aggregate Expenditure and the Multiplier. 5Topic
Sticky Wages and Prices: Aggregate Expenditure and the Multiplier 5Topic Questioning the Classical Position and the Self-Regulating Economy John Maynard Keynes, an English economist, changed how many economists
More informationBanking, Liquidity Transformation, and Bank Runs
Banking, Liquidity Transformation, and Bank Runs ECON 30020: Intermediate Macroeconomics Prof. Eric Sims University of Notre Dame Spring 2018 1 / 30 Readings GLS Ch. 28 GLS Ch. 30 (don t worry about model
More informationObjectives for Class 26: Fiscal Policy
1 Objectives for Class 26: Fiscal Policy At the end of Class 26, you will be able to answer the following: 1. How is the government purchases multiplier calculated? (Review) How is the taxation multiplier
More informationThe business of making money. Rate of return of a simple asset /1. The role of financial assets /2
1 The business of making money In a modern monetary economy, goods are typically not exchanged for goods but for fiat money. Therefore, even though people are ultimately interested in getting goods, the
More informationExpansions (periods of. positive economic growth)
Practice Problems IV EC 102.03 Questions 1. Comparing GDP growth with its trend, what do the deviations from the trend reflect? How is recession informally defined? Periods of positive growth in GDP (above
More informationText transcription of Chapter 8 Savings, Investment and the Financial System
Text transcription of Chapter 8 Savings, Investment and the Financial System Welcome to the Chapter 8 Lecture on Savings, Investment and the Financial System. Savings and investment are key ingredients
More informationMankiw Chapter 13 lecture & reading questions:
Mankiw Chapter 13 lecture & reading questions: What are the main types of financial institutions in the U.S. economy, and what is their function? What are the 4 types of saving? (Private savings, public
More informationThe Federal Reserve System and Open Market Operations
Chapter 15 MODERN PRINCIPLES OF ECONOMICS Third Edition The Federal Reserve System and Open Market Operations Outline What Is the Federal Reserve System? The U.S. Money Supplies Fractional Reserve Banking,
More informationMGT411 Money & Banking Latest Solved Quizzes By
MGT411 Money & Banking Latest Solved Quizzes By http://vustudents.ning.com Which of the following is true of a nation's central bank? It makes important decisions about the nation's tax and public spending
More informationLecture 26 Exchange Rates The Financial Crisis. Noah Williams
Lecture 26 Exchange Rates The Financial Crisis Noah Williams University of Wisconsin - Madison Economics 312/702 Money and Exchange Rates in a Small Open Economy Now look at relative prices of currencies:
More informationPART THREE. Answers to End-of-Chapter Questions and Problems
PART THREE Answers to End-of-Chapter Questions and Problems Mishkin Instructor s Manual for The Economics of Money, Banking, and Financial Markets, Eleventh Edition 58 Chapter 1 ANSWERS TO QUESTIONS 1.
More informationSavings, Investment Spending, and the Financial System
S129-S140_Krug2e_Macro_PS_Ch10.qxp 2/25/09 8:01 PM Page S-129 Savings, Investment Spending, and the Financial System 1. Given the following information about the closed economy of Brittania, what is the
More informationChapter Eleven. Chapter 11 The Economics of Financial Intermediation Why do Financial Intermediaries Exist
Chapter Eleven Chapter 11 The Economics of Financial Intermediation Why do Financial Intermediaries Exist Countries With Developed Financial Systems Prosper Basic Facts of Financial Structure 1. Direct
More informationII. Determinants of Asset Demand. Figure 1
University of California, Merced EC 121-Money and Banking Chapter 5 Lecture otes Professor Jason Lee I. Introduction Figure 1 shows the interest rates for 3 month treasury bills. As evidenced by the figure,
More informationFinancial Fragility and the Lender of Last Resort
READING 11 Financial Fragility and the Lender of Last Resort Desiree Schaan & Timothy Cogley Financial crises, such as banking panics and stock market crashes, were a common occurrence in the U.S. economy
More information9. In the figure, at an interest rate of 4 percent, the
Econ 1204 001 Final Exam All questions are worth 10 points and must go on a blue scantron. They will not be scored on this exam or on another color scantron. 1. Trade between countries a. allows each country
More informationFinancial Crises: The Great Depression and the Great Recession
Financial Crises: The Great Depression and the Great Recession ECON 40364: Monetary Theory & Policy Eric Sims University of Notre Dame Fall 2017 1 / 43 Readings Mishkin Ch. 12 Bernanke (2002): On Milton
More informationThe Fulbright Program
The Fulbright Program From Wall Street to Main Street: The Financial Crisis in the US Douglas J. Young Professor of Economics, Montana State University, USA Visiting Professor, IIT Bombay Senator J. William
More informationLiquidity. Why do people choose to hold fiat money despite its lower rate of return?
Liquidity Why do people choose to hold fiat money despite its lower rate of return? Maybe because fiat money is less risky than most of the other assets. Maybe because fiat money is more liquid than alternative
More informationFig. 1. The orthodox liquidity market model
10. Models of interest rate determination 1. The orthodox liquidity market model Definition 1.1. The orthodox liquidity (or loan or loanable funds) market model is as a competitive market model, represented
More information3.36pt. Karl Whelan (UCD) Term Structure of Interest Rates Spring / 36
3.36pt Karl Whelan (UCD) Term Structure of Interest Rates Spring 2018 1 / 36 International Money and Banking: 12. The Term Structure of Interest Rates Karl Whelan School of Economics, UCD Spring 2018 Karl
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Econ 330 Spring 2015: EXAM 1 Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If during the past decade the average rate
More informationChapter 10 AD_AS_Business Cycle.notebook. May 08, Jun 16 9:29 PM. Jun 16 9:38 PM. Jun 16 9:50 PM. Jun 16 9:46 PM
Chapter 10: Economic Fluctuations Pages 261 284, 288 291 Aggregate Demand (AD) the relationship between general price level and total spending in the economy. Four components that make up total spending:
More informationECON 201: Introduction to Macroeconomics Professor Robert Gordon Final Exam: March 18, 2016
ECON 201: Introduction to Macroeconomics Professor Robert Gordon Final Exam: March 18, 2016 NAME Directions: This test is in two parts, a multiple choice question part and a short-answer part. Use this
More informationChapter 21: Study Questions Key, Version A
Chapter 21: Study Questions Key, Version A Name: Class (day & time): Discussing the concepts and working examples with others is allowable. However, receiving answers from someone else, and turning these
More informationGROSS DOMESTIC PRODUCT
GROSS DOMESTIC PRODUCT EQ: HOW ARE GROSS DOMESTIC PRODUCT AND GROSS NATIONAL PRODUCT INFLUENCED BY BUSINESS CYCLES? IN THIS LESSON, STUDENTS WILL BE ABLE TO IDENTIFY CHARACTERISTICS OF THE GROSS DOMESTIC
More informationI. Learning Objectives II. The Functions of Money III. The Components of the Money Supply
I. Learning Objectives In this chapter students will learn: A. The functions of money and the components of the U.S. money supply. B. What backs the money supply, making us willing to accept it as payment.
More informationEconomics 1012A: Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Third Midterm Examination November 15, 2007
Economics 1012A: Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Third Midterm Examination November 15, 2007 Answer all of the following questions by selecting the most appropriate answer on
More information5. What is the Savings-Investment Spending Identity? Savings = Investment Spending for the economy as a whole
Unit 4 Test Review KEY Savings, Investment and the Financial System 1. What is a financial intermediary? Explain how each of the following fulfills that role: Financial Intermediary: Transforms funds into
More informationPart IV: The Keynesian Revolution:
1 Part IV: The Keynesian Revolution: 1945-1970 Objectives for Chapter 13: Basic Keynesian Economics At the end of Chapter 13, you will be able to answer the following: 1. According to Keynes, consumption
More informationLecture 25 Unemployment Financial Crisis. Noah Williams
Lecture 25 Unemployment Financial Crisis Noah Williams University of Wisconsin - Madison Economics 702 Changes in the Unemployment Rate What raises the unemployment rate? Anything raising reservation wage:
More informationMoney & Capital Markets Exam 1: Chapters 1, 2, 3, 4, 5 & 6. Name. Multiple Choice: 4 points each
Money & Capital Markets Exam 1: Chapters 1, 2, 3, 4, 5 & 6 Name Multiple Choice: 4 points each MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1)
More informationDEBT. Liabilities A liability is a company s (or individual s) financial debt or obligations that arise during the course of its business operations.
FINANCIAL ABCs DEBT Amortization Amortization is the paying off of debt with a fixed repayment schedule in regular installments over a period of time, e.g., with a mortgage or a car loan. Annual Percentage
More informationAggregate Demand and the Powerful Consumer
Aggregate Demand and the Powerful Consumer Dr. Ashraf Samir Website: ashraffeps.yolasite.com Contents I) Introduction II) Factors Determining Actual GDP III) The Circular Flow of Spending, Production,
More informationChapter 6 ECONOMIC GROWTH. World Economic Growth. In this chapter-
Chapter 6 ECONOMIC GROWTH In this chapter- Define and calculate the growth rate and explain the implications of sustained growth in economic activity Briefly describe the economic growth trends in the
More informationA BOND MARKET IS-LM SYNTHESIS OF INTEREST RATE DETERMINATION
A BOND MARKET IS-LM SYNTHESIS OF INTEREST RATE DETERMINATION By Greg Eubanks e-mail: dismalscience32@hotmail.com ABSTRACT: This article fills the gaps left by leading introductory macroeconomic textbooks
More informationChapter 11 1/19/2018. Basic Keynesian Model Expenditure and Tax Multipliers
Chapter 11 Basic Keynesian Model Expenditure and Tax Multipliers This chapter presents the basic Keynesian model and explains: how aggregate expenditure (C,I,G,X and M) is determined when the price level
More informationWhy is the Country Facing a Financial Crisis?
Why is the Country Facing a Financial Crisis? Prepared by: Julie L. Stackhouse Senior Vice President Federal Reserve Bank of St. Louis November 3, 2008 The views expressed in this presentation are the
More informationThe Causes of the 2008 Financial Crisis
UK Summary The Causes of the 2008 Financial Crisis The text discusses the background history of the financial crash through focusing on prime and sub-prime mortgage lending. It then explores the key reasons
More informationCouncil for Economic Education
Council for Economic Education Council for Economic Education Teaching Opportunity The Council for Economic Education (CEE) is an organization dedicated to promoting financial and economic literacy. CEE
More informationThe Financial System. Sherif Khalifa. Sherif Khalifa () The Financial System 1 / 74
The Sherif Khalifa Sherif Khalifa () The 1 / 74 The financial system consists of those institutions that match saving with investment. The financial system channels funds from those who save to those with
More information1. The real risk-free rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption.
Chapter 02 Determinants of Interest Rates True / False Questions 1. The real risk-free rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption.
More information2. Suppose a family s annual disposable income is $8000 of which it saves $2000. (a) What is their APC?
REVIEW Chapters 10 and 13 Fiscal Policy 1. Complete the following table assuming that (a) MPS = 1/5, (b) there is no government and (c) all saving is personal saving. Level of output and income Consumption
More information4. What two variables are always equal for a profit maximizing firm? Ans: Marginal revenue and marginal cost
SET 1 1. What bubble in the late 1990 s to early 2000 s significantly increased productivity growth in the US? Ans: Dot-com bubble, technology bubble 2. What is a market with only a single buyer called?
More informationGross Domestic Product
Gross Domestic Product In this lesson, students will be able to identify characteristics of the Gross Domestic Product. Students will be able to identify and/or define the following terms: Gross Domestic
More informationGlobal Financial Crisis. Econ 690 Spring 2019
Global Financial Crisis Econ 690 Spring 2019 1 Timeline of Global Financial Crisis 2002-2007 US real estate prices rise mid-2007 Mortgage loan defaults rise, some financial institutions have trouble, recession
More informationInternational Money and Banking: 14. Real Interest Rates, Lower Bounds and Quantitative Easing
International Money and Banking: 14. Real Interest Rates, Lower Bounds and Quantitative Easing Karl Whelan School of Economics, UCD Spring 2018 Karl Whelan (UCD) Real Interest Rates Spring 2018 1 / 23
More informationMoney, Banking, and Finance PLATO Global Government and Economics Mastery Test
Money, Banking, and Finance PLATO Global Government and Economics Mastery Test 1. Money is useful to people because it is: a. a medium of exchange b. prestigious c. nice to look at d. something that makes
More informationMoney and the Economy CHAPTER
Money and the Economy 14 CHAPTER Money and the Price Level Classical economists believed that changes in the money supply affect the price level in the economy. Their position was based on the equation
More informationTitle: Principle of Economics Saving and investment
Title: Principle of Economics Saving and investment Instructor: Vladimir Hlasny Institution: 이화여자대학교 Dictated: 김나정, 김민겸, 김성도, 문혜린, 박현서 [0:00] Let s recall from chapter 23 that the country s gross domestic
More informationDisclaimer: This resource package is for studying purposes only EDUCATION
Disclaimer: This resource package is for studying purposes only EDUCATION Econ 102 Care Package Chapter 23 - Financial Institutions and Financial Markets Financial institutions and markets provide the
More information