Hypothetical market that illustrates the
The interest rate at which the quantity
of loanable funds supplied equals the THE MARKET FOR LOANABLE market outcome of the demand for funds
generated by borrowers and the supply of
CHAPTER 25
quantity of loanable funds demanded
INFLATION & is the equilibrium interest rate
FUNDS funds provided by lenders.
A global loanable funds market arises
INTEREST RATE SAVINGS = INVESTMENT (always)
when international capital flows are so SHIFTS DEMAND SHIFTS SUPPLY
large that they equalize interest rates THE SAVINGS-INVESTMENT Changes in perceived business
across countries Changes in private savings behavior:
SPENDING IDENTITY opportunities: changes in beliefs
Households cutting up on spending
about the payoff of investing
Capital moves from places where it (coronavirus)
spending
would be cheap in the absence of OPEN ECON.
CLOSED ECON. IMP/EXP = 0 Changes in net capital inflows: Capital
international capital flows to places Changes in gov. borrowing:
Budget surplus: TR > Net capital inflow: the total flows into and out of a country can
where it will be expensive without them government that runs budget
Spending inflow of foreign funds minus change as investors’ perceptions of
(equilibrium) deficits can be a major source of
Budget deficit: Tax.Rev < S the total outflow of domestic that country change. Example:
The most important factor affecting funds to other countries. demand for loanable funds
- gov. borrowing Introduction of € in one country (safe
interest rates over time, is changing place to invest)
Crowding out: occurs when a
expectations about future inflation,
government budget deficit
which shifts both supply and demand
drives up the interest rate
for loanable funds
and leads to reduced
investment spending.
Financial markets are where households invest
The true cost of borrowing is the real THE FINANCIAL SYSTEM their current and accumulated savings. A
household's weal this the value of its
interest rate, not the nominal interest
accumulated savings.
rate. A financial asset is a paper claim that entitles
FINANCIAL ASSETS the buyer to future income from the seller
The Fisher effect: an increase in expected The financial system is the collection of
future inflation drives up the nominal markets and institutions that facilitate the flow
interest rate, leaving the expected real of funds from lenders to borrowers.
interest rate unchanged.
TASKS FINANCIAL SYSTEM
LOANS - PRÉSTAMO BONDS LOAN-BACKED SECURITY STOCKS Reducing Transaction Costs: the expenses of
A loan is a lending A concern for Bonds backed by a pool negotiating and executing a deal
of loans and selling Shares in the
agreement investors is the ownership of a Reducing Risk: ‘An individual can engage in
shares in that pool. The
between an possibility of diversification by investing in several different
company
SAVINGS,
types of loans can be car
individual lender default, the risk that loans, credit card debt, assets so that the possible loses are
and an individual the bond issuer will student loans. independent events.
INVESTMENT,
borrower. fail to make the More diversification and Providing Liquidity: if it can be quickly
Involves a lot of specified payments liquidity than individual converted into cash with relatively little los of
transaction costs loans value.
SPENDING
FINANCIAL INTERMEDIARIES Financial intermediary is an institution that transforms
the funds it gathers from many individuals into financial
assets
MUTUAL FUNDS PENSION FUNDS AND LIFE BANKS ASSET PRICE EXPECTATIONS - THE EFFICIENT MARKET HYPOTHESIS
Is a financial INSURANCE COMPANIES Is a financial
intermediary that The value of an asset comes from its ability to generate higher
intermediary that Pension fund is a
creates a stock type of mutual fund provides liquid assets future consumption of goods or services
portfolio and then that holds assets in in the form of bank
order to provide According to the efficient markets hypothesis, asset prices embody
resells shares of deposits to lenders
retirement income
and uses those funds
all publicly available information. At any point, stock prices are fairly
this portfolio to life insurance
to finance the illiquid valued. Prices should change only in response of new information,
individual investors. company: guarantee
a payment to a investment spending since this new info is unpredictable, stock prices will follow a
Example: S&P500 beneficiaries when needs of borrowers. random walk (mov. over time of an unpredictable variable
the policyholder dies
IRRATIONAL MARKETS
Markets often behave irrationally and that a smart investor can
FINANCIAL FLUCTUATIONS engage in successful market timing—buying stocks when they are
underpriced and selling them when they are overpriced.
The interest rate at which the quantity
of loanable funds supplied equals the THE MARKET FOR LOANABLE market outcome of the demand for funds
generated by borrowers and the supply of
CHAPTER 25
quantity of loanable funds demanded
INFLATION & is the equilibrium interest rate
FUNDS funds provided by lenders.
A global loanable funds market arises
INTEREST RATE SAVINGS = INVESTMENT (always)
when international capital flows are so SHIFTS DEMAND SHIFTS SUPPLY
large that they equalize interest rates THE SAVINGS-INVESTMENT Changes in perceived business
across countries Changes in private savings behavior:
SPENDING IDENTITY opportunities: changes in beliefs
Households cutting up on spending
about the payoff of investing
Capital moves from places where it (coronavirus)
spending
would be cheap in the absence of OPEN ECON.
CLOSED ECON. IMP/EXP = 0 Changes in net capital inflows: Capital
international capital flows to places Changes in gov. borrowing:
Budget surplus: TR > Net capital inflow: the total flows into and out of a country can
where it will be expensive without them government that runs budget
Spending inflow of foreign funds minus change as investors’ perceptions of
(equilibrium) deficits can be a major source of
Budget deficit: Tax.Rev < S the total outflow of domestic that country change. Example:
The most important factor affecting funds to other countries. demand for loanable funds
- gov. borrowing Introduction of € in one country (safe
interest rates over time, is changing place to invest)
Crowding out: occurs when a
expectations about future inflation,
government budget deficit
which shifts both supply and demand
drives up the interest rate
for loanable funds
and leads to reduced
investment spending.
Financial markets are where households invest
The true cost of borrowing is the real THE FINANCIAL SYSTEM their current and accumulated savings. A
household's weal this the value of its
interest rate, not the nominal interest
accumulated savings.
rate. A financial asset is a paper claim that entitles
FINANCIAL ASSETS the buyer to future income from the seller
The Fisher effect: an increase in expected The financial system is the collection of
future inflation drives up the nominal markets and institutions that facilitate the flow
interest rate, leaving the expected real of funds from lenders to borrowers.
interest rate unchanged.
TASKS FINANCIAL SYSTEM
LOANS - PRÉSTAMO BONDS LOAN-BACKED SECURITY STOCKS Reducing Transaction Costs: the expenses of
A loan is a lending A concern for Bonds backed by a pool negotiating and executing a deal
of loans and selling Shares in the
agreement investors is the ownership of a Reducing Risk: ‘An individual can engage in
shares in that pool. The
between an possibility of diversification by investing in several different
company
SAVINGS,
types of loans can be car
individual lender default, the risk that loans, credit card debt, assets so that the possible loses are
and an individual the bond issuer will student loans. independent events.
INVESTMENT,
borrower. fail to make the More diversification and Providing Liquidity: if it can be quickly
Involves a lot of specified payments liquidity than individual converted into cash with relatively little los of
transaction costs loans value.
SPENDING
FINANCIAL INTERMEDIARIES Financial intermediary is an institution that transforms
the funds it gathers from many individuals into financial
assets
MUTUAL FUNDS PENSION FUNDS AND LIFE BANKS ASSET PRICE EXPECTATIONS - THE EFFICIENT MARKET HYPOTHESIS
Is a financial INSURANCE COMPANIES Is a financial
intermediary that The value of an asset comes from its ability to generate higher
intermediary that Pension fund is a
creates a stock type of mutual fund provides liquid assets future consumption of goods or services
portfolio and then that holds assets in in the form of bank
order to provide According to the efficient markets hypothesis, asset prices embody
resells shares of deposits to lenders
retirement income
and uses those funds
all publicly available information. At any point, stock prices are fairly
this portfolio to life insurance
to finance the illiquid valued. Prices should change only in response of new information,
individual investors. company: guarantee
a payment to a investment spending since this new info is unpredictable, stock prices will follow a
Example: S&P500 beneficiaries when needs of borrowers. random walk (mov. over time of an unpredictable variable
the policyholder dies
IRRATIONAL MARKETS
Markets often behave irrationally and that a smart investor can
FINANCIAL FLUCTUATIONS engage in successful market timing—buying stocks when they are
underpriced and selling them when they are overpriced.
