Chapter 10: Savings, investment spending, and the financial system Flashcards Preview

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Flashcards in Chapter 10: Savings, investment spending, and the financial system Deck (21)
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1
Q

The savings-investment spending identity (SISI)

A

FACT: savings and investment spending are always =.

2
Q

SISI in a closed economy

A
  1. No exports (X=0) or imports (M = 0)
  2. C = consumer spending
    I = investment spending
    G = Gov’t spending
    S = savings
  3. GDP = C+ I + G, total income = total spending
  4. GDP (total income) = C + G (consumption spending) + S
  5. GDP (total income) = C + G (consumption spending) + I
  6. C + G + S = C + G + I; S = I
3
Q

Budget surplus

A

tax revenue > gov’t spending

4
Q

Budget deficit

A

tax revenue < gov’t spending

5
Q

Budget balance

A
  1. tax revenue = gov’t spending
  2. can also refer to a deficit or surplus
  3. S = gov’t savings
    T = Tax revenues
    G = Gov’t spending
    TR = value of gov’t transfers
  4. S = T - G - TR
6
Q

National savings

A
  1. S (national) = S (gov’t) + S (private)

2. S (national) = I

7
Q

SISI in an open economy

A
  1. Savings need not be spent on investment spending projects in the same country in which savings are generated- this investment can occur in other countries.
  2. Any given country:
    a. can receive inflows (foreign savings that finance investment spending in that country)
    b. can generate outflows (domestic savings that finance investment spending in another country)
8
Q

Net capital inflow

A

= total inflow – total outflow

9
Q

National savings vs capital inflow

A
  1. $1 generated by national savings is different from $1 in capital inflow
  2. Both can finance the same $1 in investment spending
  3. But any $1 borrowed from a saver must eventually be repaid with interest.
10
Q

Investment spending

A

Investment spending = S (national) + KI (capital inflow)

I = S (private) + S (gov’t) + (M - X) = S (national) + KI

11
Q

3 different kinds of capital

A
  1. Physical
  2. Human
  3. Financial
12
Q

Loanable funds market

A

Hypothetical market that examines the market outcome of demand for funds generated by borrowers and supply of funds provided by lenders

13
Q

Rate of return

A

Profit earned on the project expressed as a % of it’s cost

Rate of return = (revenue from project - cost of project)/cost of project x 100

14
Q

Shifts of the demand for loanable funds

A
  1. Changes in perceived business opportunities

2. Changes in gov’t borrowing

15
Q

Crowding out

A

Occurs when a govt deficit drives up the interest rate and leads to reduced investment spending

16
Q

Shifts of the supply for loanable funds

A
  1. Changes in private savings behavior (ex: 2000-06: rising US home prices made many home owners feel richer, more willing to spend more and save less; shifted supply of loanable funds to the left)
  2. Changes in capital inflows (Ex: 2003-06: US received large capital inflows from China and Mid East. Helped fuel a big increase in residential investment spending) ? shift to right
17
Q

Interest rates

A
  1. Anything that shifts either supply or demand of loanable funds changes the interest rate
18
Q

Major factors in changes of interest rates

A
  1. changes in govt policy
  2. technological innovations that created new investment opportunities
  3. Changing expectations about future inflation (shifts both supply and demand for loanable funds)
19
Q

Inflation and interest rates

A
  1. Real Interest rate = nominal interest rate - inflation rate
  2. In real world, neither borrowers nor lenders know what the future inflation rate will be when they make a deal
  3. Actual loan contracts specify nominal interest rate not real interest rate
20
Q

Fisher Effect

A

An increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged

21
Q

Financial system

A
  1. A household’s wealth is the value of it’s accumulated savings
  2. A financial asset is a paper claim that entitles the buyer to future income from the seller
  3. A physical asset is a claim on a tangible object that gives the owner the right to dispose of the object as he/she wishes