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AP Economics

AP Economics. Mr. Bernstein Module 22 : Saving, Investment and the Financial System March 6 , 2014. AP Economics Mr. Bernstein. Saving, Investment and the Financial System Objectives - Understand each of the following: The relationship between savings and investment spending

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AP Economics

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  1. AP Economics Mr. Bernstein Module 22: Saving, Investment and the Financial System March 6, 2014

  2. AP EconomicsMr. Bernstein Saving, Investment and the Financial System • Objectives - Understand each of the following: • The relationship between savings and investment spending • The purpose of the four principal types of financial assets: stocks, bonds, loans and bank deposits • How financial intermediaries help investors achieve diversification and help firms source funding of physical capital

  3. AP EconomicsMr. Bernstein The Savings-Investment Spending Identity • Assume a simple economy – no G, no Xn • Total Income = Total Spending • All money spent winds up in another’s pocket as income • Total Income = Consumption + Savings • Total Spending = Consumption + Investment • So C + S = C + I…and S = I

  4. AP EconomicsMr. Bernstein The Savings-Investment Spending Identity, cont. • Adding in Government • Budget Balance (BB) = Tax revenue – G – Transfers • BB > 0 is a surplus, BB < 0 is a deficit • Now we have S + BB = I • Notice is BB is a deficit, I must decrease

  5. AP EconomicsMr. Bernstein The Savings-Investment Spending Identity, cont. • Adding in Capital Inflows/Outflows • Investors can save in home country or overseas • Capital Inflow (CI) is foreign savings coming into the USA minus US savings flowing out • Now we have S + BB + CI = I • Notice when CI > 0, I must increase

  6. AP EconomicsMr. Bernstein Three Tasks of a Financial System • Reducing Transactions Costs • Making it easier and less costly to engage in borrowing or other financial transactions • Reducing Risk • Reducing Financial Risk – ie sharing ownership • Diversification – investing in assets with unrelated risks • Providing Liquidity • Ease of turning asset into cash • Done via loans, stocks, bonds

  7. AP EconomicsMr. Bernstein Key Financial System Terms • Wealth = accumulated savings • Financial Asset = Paper Claim to future income • Loans: Lending agreement between borrower and lender • Bonds: Promise by seller to pay fixed amount of payments plus all principal on maturity date • Loan-Backed Securities: Pool of loans “securitized” • Stocks: Slices or “shares” of ownership • Physical Assets • Liabilities

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