economics summary Q1 year 2
chapter 24 saving, investment and the financial system
Financial System: The group of institutions that help to match one person’s saving with
another person’s investment.
financial institutions in the economy
1. Financial Markets: Savers can directly provide funds to borrowers.
- Bond Market: Bond is a certificate of indebtedness that specifies the obligations of
the borrower to the holder of the bond.
● date of maturity; identifies the time at which the loan will be repaid
● bonds term; length time until the bond matures
● perpetuity; bond that never matures
● credit risk; probability that the borrower will fail to pay some of the
interest or principal → default
● sovereign debt; national governments want to borrow money to finance public
spending
● junk bonds; shaky corporations which pay high interest rate. tegenover
gestelde is gilt-edged
important is relationship between bonds price and yield.
yield of bond; coupon/ price x 100
- Stock Market: Stock (or share or equity) is a claim of partial ownership in a firm. claim
to the future profits that the firm makes.
● equity finance; sale of stock to raise money
● debt finance; sale of bonds
● primary market; first time sales
● stock index; average of group of share prices
2. Financial Intermediaries: Savers can indirectly provide funds to borrowers.
intermediaries;
- Banks; take deposits, make loans
● medium of exchange; item that people can easily use to engage in
transactions
- Investment Funds, Pension Funds, Insurance Comp.;
● investment or mutual fund; institution that sells to the public and uses the
proceeds to buy a portfolio of stocks and bonds.
they allow people with small amounts of money to diversify.
key terms;
- price;
last price; price at which the stock more recently traded
- dividend;
- price-earnings ratio; the price of the corporations stock dividend by the amount te
corporation earned per share over the past year. normally 15. a higher pe indicates
that the corporation's stock is expensive relative to its recent earnings
other financial instruments
collateralized debt obligations (CDOs) are pools of asset-backed securities which are
,dependent on the value of the asset that backs them up and the stream of income that flows
from these assets. a manager encourages investors to buy bonds, the funds of which are
used to buy pools of debt.
- sub-primte market; individuals not traditionally seen as being part of the financial
markets bc of their high credit risk.
credit default swaps (CDS); a means by which bondholders can insure themselves against
the risk of default.
- protection buyer; bank seeking to insure the risk
- protection seller; insurance company or other financial institution
- credit event; bond was subject to default this would trigger a payment
- at a lower price the risk involved for the protection buyer is higher and they can
exercise a collateral call
saving and investment in the national income accounts
the bond market, stock market, banks and investment funds are important in the economy's
saving and investment, which are important for long run growth in gdp and living standards.
key macro economic variables;
Recall that GDP is both total income in an economy and total expenditure on the economy’s
output of goods and services:
Y = C + I + G + NX
y= gdp
c= consumption
i= investment
g= government purchases
nx= net exports
soms word het = teken met drie streepjes, omdat beide kanten gelijk zijn
open economies= interact with other economies around the world
closed economy= one that doesnt interact with other economies, doesnt engage in
international trade in goods and services and doenst engage in international borrowing and
lending
- Y=C+I+G
Now, subtract C and G from both sides of the equation:
Y–C–G =C+I+G–C–G
Now we have:
Y–C–G=I
Y – C – G is called National Saving (S), and for the whole economy it must be equal
to Investment. → S = I
The left side of the equation is the total income in the economy after paying for consumption
and government purchases and is called national saving, or just saving (S).
National Saving or saving, is equal to:
S=Y–C–G–T+T
S = (Y – T – C) + (T – G)
, t= taxes
(Y – T – C) = Private Saving
(T – G) = Public saving
private saving; the income that households have left after paying for taxes and consumption
public saving; the tax revenue that the government has left after paying for its spending
budget surplus; where government tax revenue is greater than spending bc it receives more
money than it spends. if T exceeds G. this surplus of t-g represents public saving
budget deficit; where government tax revenue is less than spending and the government has
to borrow to finance spending. G larger than t, T-G is a negative number. government has to
borrow money
government deficit; situation where government spends more than it generates in tax
revenue over period
national debt; accumulation of the total debt owed by the government
the market for loanable funds
savers → Market for Loanable Funds → borrowers
= the market in which those who want to save supply funds, and those who want to borrow
to invest demand funds
supply and demand for loanable funds
The supply of loanable funds comes from The Savers → people who have some extra
income they want to save and lend out.
The demand for loanable funds comes from The Borrowers (investment) → wish to
borrow to make investments.
The (real) interest rate is the price of the loan.The equilibrium of the supply and demand for
loanable funds determines the real interest rate. The difference between the nominal interest
rate and the inflation rate.
nominal interest rate; rate usually reported
because of inflation, the real interest rate more reflects the real return to saving and cost of
borrowing. the interest rate is about the real interest rate.
Government Policies That Affect Saving and Investment
chapter 24 saving, investment and the financial system
Financial System: The group of institutions that help to match one person’s saving with
another person’s investment.
financial institutions in the economy
1. Financial Markets: Savers can directly provide funds to borrowers.
- Bond Market: Bond is a certificate of indebtedness that specifies the obligations of
the borrower to the holder of the bond.
● date of maturity; identifies the time at which the loan will be repaid
● bonds term; length time until the bond matures
● perpetuity; bond that never matures
● credit risk; probability that the borrower will fail to pay some of the
interest or principal → default
● sovereign debt; national governments want to borrow money to finance public
spending
● junk bonds; shaky corporations which pay high interest rate. tegenover
gestelde is gilt-edged
important is relationship between bonds price and yield.
yield of bond; coupon/ price x 100
- Stock Market: Stock (or share or equity) is a claim of partial ownership in a firm. claim
to the future profits that the firm makes.
● equity finance; sale of stock to raise money
● debt finance; sale of bonds
● primary market; first time sales
● stock index; average of group of share prices
2. Financial Intermediaries: Savers can indirectly provide funds to borrowers.
intermediaries;
- Banks; take deposits, make loans
● medium of exchange; item that people can easily use to engage in
transactions
- Investment Funds, Pension Funds, Insurance Comp.;
● investment or mutual fund; institution that sells to the public and uses the
proceeds to buy a portfolio of stocks and bonds.
they allow people with small amounts of money to diversify.
key terms;
- price;
last price; price at which the stock more recently traded
- dividend;
- price-earnings ratio; the price of the corporations stock dividend by the amount te
corporation earned per share over the past year. normally 15. a higher pe indicates
that the corporation's stock is expensive relative to its recent earnings
other financial instruments
collateralized debt obligations (CDOs) are pools of asset-backed securities which are
,dependent on the value of the asset that backs them up and the stream of income that flows
from these assets. a manager encourages investors to buy bonds, the funds of which are
used to buy pools of debt.
- sub-primte market; individuals not traditionally seen as being part of the financial
markets bc of their high credit risk.
credit default swaps (CDS); a means by which bondholders can insure themselves against
the risk of default.
- protection buyer; bank seeking to insure the risk
- protection seller; insurance company or other financial institution
- credit event; bond was subject to default this would trigger a payment
- at a lower price the risk involved for the protection buyer is higher and they can
exercise a collateral call
saving and investment in the national income accounts
the bond market, stock market, banks and investment funds are important in the economy's
saving and investment, which are important for long run growth in gdp and living standards.
key macro economic variables;
Recall that GDP is both total income in an economy and total expenditure on the economy’s
output of goods and services:
Y = C + I + G + NX
y= gdp
c= consumption
i= investment
g= government purchases
nx= net exports
soms word het = teken met drie streepjes, omdat beide kanten gelijk zijn
open economies= interact with other economies around the world
closed economy= one that doesnt interact with other economies, doesnt engage in
international trade in goods and services and doenst engage in international borrowing and
lending
- Y=C+I+G
Now, subtract C and G from both sides of the equation:
Y–C–G =C+I+G–C–G
Now we have:
Y–C–G=I
Y – C – G is called National Saving (S), and for the whole economy it must be equal
to Investment. → S = I
The left side of the equation is the total income in the economy after paying for consumption
and government purchases and is called national saving, or just saving (S).
National Saving or saving, is equal to:
S=Y–C–G–T+T
S = (Y – T – C) + (T – G)
, t= taxes
(Y – T – C) = Private Saving
(T – G) = Public saving
private saving; the income that households have left after paying for taxes and consumption
public saving; the tax revenue that the government has left after paying for its spending
budget surplus; where government tax revenue is greater than spending bc it receives more
money than it spends. if T exceeds G. this surplus of t-g represents public saving
budget deficit; where government tax revenue is less than spending and the government has
to borrow to finance spending. G larger than t, T-G is a negative number. government has to
borrow money
government deficit; situation where government spends more than it generates in tax
revenue over period
national debt; accumulation of the total debt owed by the government
the market for loanable funds
savers → Market for Loanable Funds → borrowers
= the market in which those who want to save supply funds, and those who want to borrow
to invest demand funds
supply and demand for loanable funds
The supply of loanable funds comes from The Savers → people who have some extra
income they want to save and lend out.
The demand for loanable funds comes from The Borrowers (investment) → wish to
borrow to make investments.
The (real) interest rate is the price of the loan.The equilibrium of the supply and demand for
loanable funds determines the real interest rate. The difference between the nominal interest
rate and the inflation rate.
nominal interest rate; rate usually reported
because of inflation, the real interest rate more reflects the real return to saving and cost of
borrowing. the interest rate is about the real interest rate.
Government Policies That Affect Saving and Investment
