savings. investment and the financial system Flashcards
the financial system
is made up of financial institutions that coordinate the actions of savers and borrowers
financial markets
stock and bond matket - institutions through which savers can directly provide funds to borrowers
financial intermediaries
banks. mutual funds, pension funds, insurance companies - financial institutions through which savers can indirectly provide funds to borrowers
bond
a certificate of indebtedness that specifies obligations of the borrower to the holder of the bond
term
the length of time until the bond matures
credit risk
the probability that the borrower will fail to pay some of the interest/principal
stock
represents a claim to a partial ownership in a firm; is a claim to the profits that a firm makes
equity financing
the sale of stock to raise money
banks
take deposits from people who want to save and use deposits to make loans to people who want to borrow
pay depositors interest on their deposits and charge borrowers slightly higher interest rate on their loans
banks earn their profit based on the difference between deposit and loan interest rate
investment funds
sell shares to the public and uses the proceeds to buy a portfolio of various types of stocks/bonds
investment =
Y - C - G = I
national saving
the total income in the economy after paying for consumption and govt. purchases
private saving
the amount of income that households have left after paying their taxes and paying for their consumption
(Y - T - C)
public saving
the amount of tax revenue that the government has left after paying for its spending
(T - G)
budget surplus
when T > G
the government receives more money than it spends
