PRINCIPLES OF MACROECONOMICS Lecture 3: Savings, Investment, & the Financial System

Transcription

1 PRINCIPLES OF MACROECONOMICS Lecture 3: Savings, Investment, & the Financial System Instructor: Chi Man Yip

2 WHERE ARE WE? In Short: Macro Data: Measuring a Nation s Income & the Cost of Living (Ch. 5-6) (Done) Loan Market: Saving, Investment, & the Financial System. (Ch. 8) Money Market: The Monetary System (Ch. 9-11) Currency Market: The Macroeconomics of Open Economies (Ch ) Good Market: Aggregate Demand & Aggregate Supply (Ch. 14) Government Policy: Monetary & Fiscal Policy (Ch. 15)

3 LEARN THE BASICS In this course: Learn 2 Curves: Demand Curve & Supply Curve These 2 Curves jointly determine Price & Quantity

4 LEARN THE BASICS: EXAMPLES Loan Market Demand & Supply for loans jointly determine interest rate & Quantity of Loan Currency Market Demand & Supply for currency jointly determine exchange rate & Quantity of currency Good Market Demand & Supply for goods jointly determine price & Quantity of Goods

5 LEARN THE BASICS In this course: Learn 2 Curves: Demand Curve & Supply Curve These 2 Curves jointly determine Price & Quantity 1 Learn what factors affect the two curves. 2 Learn how these factors affect the two curves, price, & quantity.

6 DEFINITION: CLOSED & OPEN ECONOMY Closed Economy: An economy that does not interact with other economies. No International Trade, Borrowing, & Lending Y = C + I + G Open Economy: An economy that interacts with other economies. Y = C + I + G + NX

7 MARKET FOR LOANABLE FUNDS: THE BASICS Good: Loanable Funds Price: Interest Rate

8 WHY DO WE SAVE? Returns: Interest Interest Rate Supply of Loanable Funds Supply Curve: Upward Sloping

9 THE COST OF LOANABLE FUNDS Cost: Interest Interest Rate Demand for Loanable Funds Demand Curve: Downward Sloping

10 EQUILIBRIUM Equilibrium: The 2 curves JOINTLY determines the interest rate & the amounts of loanable funds.

11 SAVING: Saving is the source of the supply of loanable funds. 1 What factors affect Saving? 2 How do these factors affect Saving?

12 SAVING: Assume Closed Economy. NO NX. In this economy, there are two persons: Adam & Eve. They produce 10 apples a day: Adam consumes 3 & Eve consumes 2. I can t consume their apples because it is a closed economy. They can t consume eggs because it is a closed economy.

13 SAVING: Assume Closed Economy. NO NX. In this economy, there are two persons: Adam & Eve. They produce 10 apples a day: Adam consumes 3 & Eve consumes 2. Y = the market value of the 10 Apples. C = the market value of 5 apples.

14 SAVING: Government: Tax 2 apples from each person a day. Government: Feed a snake with 1 apple a day. Y = the market value of the 10 Apples. C = the market value of 5 apples. G = the market value of 1 apple.

15 SAVING: Savings (S): 4 apples. Y = the market value of the 10 Apples. C = the market value of 5 apples. G = the market value of 1 apple. S = Y C G. i.e., S = = 4.

16 SAVING: Tax (T): A Lump-Sum Tax. i.e., 4 apples. S = Y C G S = Y C G + T T S = (Y C T) }{{} + (T G) }{{} Private Saving Public Saving Private Saving: 1 apples. Public Saving: 3 apple. National Saving: 4 apples. National Saving= Private Saving+Public Saving

17 DEFINITE: BUDGET Budget Surplus: T > G. Budget Deficit: T < G. Balanced Budget: T = G.

18 POLICY 1: BUDGET DEFICIT More Budget Deficit i.e., T G Public Saving & Private Saving unchanged National Saving Supply of Loanable Funds Supply Curve of Loanable Funds shift to the left Consequently, the interest rate & the equilibrium quantity of loanable funds.

19 POLICY 1: BUDGET DEFICIT More Budget Deficit i.e., T G

20 POLICY 2: SAVING INCENTIVE Tax Reform that encourages saving Private Saving & Public Saving unchanged National Saving Supply of Loanable Funds Supply Curve of Loanable Funds shift to the right Consequently, the interest rate & the equilibrium quantity of loanable funds.

21 POLICY 2: SAVING INCENTIVE Tax Reform that encourages saving

22 POLICY 3: INVESTMENT INCENTIVE An investment tax credit is introduced to give a tax advantage to any firm building a new factory or buying a new piece of equipment. Demands for Loanable Funds Demand Curve of Loanable Funds shift to the right Consequently, the interest rate & the equilibrium quantity of loanable funds.

23 POLICY 3: INVESTMENT INCENTIVE An investment tax credit is introduced to give a tax advantage to any firm building a new factory or buying a new piece of equipment.

24 EXERCISE 1: What happens to the economy if the government increases government expenditure? How does it affect public saving, private saving, national saving, interest rate, and the equilibrium quantity of loanable fund? Use a supply-and-demand diagram to analyze this issue.

25 EXERCISE 2: What happens to the economy if the government increases the lump-sum transfer? How does it affect public saving, private saving, national saving, interest rate, and the equilibrium quantity of loanable fund? Use a supply-and-demand diagram to analyze this issue.

26 EXERCISE 3: Stampede starts next week. Households on average spend CAD$300 there. How does it affect public saving, private saving, national saving, interest rate, and the equilibrium quantity of loanable fund? Use a supply-and-demand diagram to analyze this issue.