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  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 26 of 36 Saving, Investment, and the Financial System Section 20 of 25 … Figure 2 - Saving Incentives Increase the Supply of Loanable Funds A change in the tax laws to encourage Americans to save more would shift the supply of loanable funds to the right, from S1 to S2. The equilibrium interest rate falls, from 5 percent to 4 percent The lower interest rate stimulates investment. The equilibrium quantity of loanable funds saved and invested increases from $1,200 billion to $1,600 billion. … Three government policies that affect the economy's saving and investment: Policy 1: saving incentives Policy 2: investment incentives Policy 3: government budget deficits and surpluses … Policy 1: saving incentives, continued. Let's consider the effect of a tax reduction on savings on the market for loanable funds, per Figure 2. One way this could happen is if the amoun...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 26 of 36 Saving, Investment, and the Financial System Section 19 of 25 … Three government policies that affect the economy's saving and investment: Policy 1: saving incentives Policy 2: investment incentives Policy 3: government budget deficits and surpluses … Policy 1: saving incentives Americans save a smaller percent of their incomes than people in many other countries, such as Japan and Germany. Many U.S. policymakers consider the low level of U.S. saving to be a problem. … Restated from Chapter 1, the Ten Principles of Economics: 1: people face trade-offs 2: the cost of something is what you give up to get it 3: rational people think at the margin 4: people respond to incentives 5: trade can make everyone better off 6: markets are usually a good way to organize economic activity 7: governments can sometimes improve market outcomes 8: a country's standa...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 26 of 36 Saving, Investment, and the Financial System Section 18 of 25 … In Figure 1, market for loanable funds · the equilibrium interest rate is 5 percent · the quantity of loanable funds demanded = quantity of loanable funds supplied = $1,200 billion .... Saving represents supply of loanable funds. Investment represents demand for loanable funds. The market coordinates saving and investment with the price, which is the interest rate. In the market for loanable funds when the interest rate adjusts to balance supply and demand, it coordinates · behavior of people who want to save - the suppliers of loanable funds · behavior of people who want to invest - the demanders of loanable funds … We can use the Figure 1 model of the market for loanable funds to examine how change of government policies affect saving and investment in the economy. To analyze changes of ...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 26 of 36 Saving, Investment, and the Financial System Section 17 of 25 … In Figure 1, market for loanable funds · the equilibrium interest rate is 5 percent · the quantity of loanable funds demanded = quantity of loanable funds supplied = $1,200 billion … If the interest rate became lower than equilibrium level, e.g. 4%, quantity of loanable funds supplied would be less than quantity of loanable funds demanded. The resulting loanable funds shortage would force a higher interest rate. The new higher interest rate, back at the equilibrium rate of 5%, would · encourage saving, increasing quantity of loanable funds supplied · discourage borrowing, decreasing quantity of loanable funds demanded … Conversely, if the interest rate became higher than the equilibrium level, e.g. 6%, quantity of loanable funds supplied would be more than the quantity of loanable funds de...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 26 of 36 Saving, Investment, and the Financial System Section 16 of 25 … Figure 1 – The Market for Loanable Funds The interest rate in the economy adjusts to balance supply and demand for loanable funds. The supply of loanable funds comes from national saving including private saving and public saving. Private savings is the amount of income households have left after consumption spending and taxes. Public saving is the amount of tax revenue the government has left spending (which is unusual, see Figure 1A). The demand for loanable funds comes from firms and households that want to borrow for investment purposes. In Figure 1 the equilibrium interest rate is 5 percent. $1,200 billion of loanable funds are supplied and demanded. … The economy's market for loanable funds like other markets is governed by supply and demand. The supply of loanable funds primarily co...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 26 of 36 Saving, Investment, and the Financial System Section 15 of 25 … We will now build a model of financial markets. The purpose of this model is to help explain how financial markets coordinate the economy's saving and investment. The model also gives us a tool with which we can analyze government policies that influence saving and investment. … For simplicity, we assume · the economy has only one financial market called the market for loanable funds · all savers go to this market to deposit their savings · all borrowers go to this market to borrow money as loans The term loanable funds refers to · all income people choose to save and deposit in savings rather than spend for current consumption · which equals the amount investors choose to borrow to fund new investment projects … In this simplified model, the market for loanable funds has one interest rate...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 26 of 36 Saving, Investment, and the Financial System Section 14 of 25 … The terms saving and investment can be confusing. Suppose Tom earns more than he now wants to spend. He deposits his unspent income in a bank or buys some stock or bonds. He thinks of his act as investing his money. But to an economist investment means the purchase of new capital including equipment and buildings, so Tom's act is saving not investment. By spending less than his income Tom is adding to the nation’s saving. … When Tom borrows from a bank to finance building a new house for himself he adds to the nation's investment. The purchase of a new house is the one form of household spending that is considered investment rather than consumption. When Apex Corporation sells stock and uses the proceeds to build a new factory it adds to the nation's investment. … The accounting id...

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 26 of 36 Saving, Investment, and the Financial System Section 13 of 25 … GDP (Y) consists of four components of expenditure · consumption, C · investment, I · government purchases, G · net exports, NX So, Y = C + I + G + NX … Here we simplify the analysis of GDP by assuming the economy is closed. A closed economy (within one country) does not interact with other economies. It does not -participate in international trade in goods, having no exports nor imports -participate in international borrowing and lending Assuming a closed economy is a useful simplification we can use to learn some lessons that apply to all economies. It can also be considered a model of a completely integrated world economy, with no imports nor exports, as within the U.S. … A closed economy does not have international trade imports and exports are zero, so net exports, NX, are zero. So, in ...

  The Laffer Curve – Lower Tax Rates Now Mean Higher Tax Revenues Later Sources include Gregory Mankiw’s Principles of Economics, 5th Ed., and ChatGPT. At a meeting in 1974 economist Arthur Laffer drew a figure to show how tax rates affect tax revenue, looking like Figure 1. He said the United States was on the downward-sloping right side of the curve, point A. This meant tax rates were so high reducing them would raise tax revenue, up toward point C. Why? The tax rate cut would stimulate so much additional economic activity that tax revenues would increase. The Laffer curve theory of too-high taxes was resulting in low tax revenues was accepted by President Ronald Reagan. The views of Laffer and Reagan became known as supply-side economics. Supply-side economists contend the Reagan tax cuts and economy boom of the 1980s proved the Laffer Curve. … Per Figure 1 the goal of Democrat politicians is to be at point C. They want to set tax rates where current tax revenues are maximized. ...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 26 of 36 Saving, Investment, and the Financial System Section 12 of 25 … Abbreviations used in this section: Y = GDP = gross domestic product C = consumption I = investment G = government purchases NX = net exports S = saving T = taxes … Gross domestic product, GDP is both · total income from sales of an economy’s output (production) of goods (and services) · total expenditure (consumption) on the economy's output of goods GDP (Y) consists of four components of expenditure · consumption, C · investment, I · government purchases, G · net exports, NX I includes investments by both US and foreign based companies. Y equals the sum of the four components C, I, G, NX so, Y = C + I + G + NX This equation is an identity and must always hold because · every dollar of expenditure contained on the left side Y · is contained in one of the four components on the righ...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 26 of 36 Saving, Investment, and the Financial System Section 11 of 25 … The institutions of the financial system including bond market, stock market, banks, and mutual funds, coordinate the economy's saving and investment. Saving and investment are main determinants of GDP and living standards growth. Macroeconomists must understand how financial markets work and how various policies and events affect them. To start an analysis of financial markets we discuss the key macroeconomic variables that measure activity in financial markets. Our emphasis here is on accounting data, not on behavior that creates the data. … Accounting refers to how various numbers are defined and summed up. A personal accountant helps an individual add up their income and expenses. A national income accountant, a macroeconomist, does the same for the economy as a whole. National income ...

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 26 of 36 Saving, Investment, and the Financial System Section 10 of 25 … 2 · financial intermediaries, indirect finance: including banks and mutual funds - continued A mutual fund is an institution that sells shares of a mutual fund portfolio to the public, the portfolio being a group of stocks and bonds. The shareholder of the mutual fund accepts all the risk and return associated with the portfolio, the same as with owning individual stock shares and bonds. If the value of the portfolio rises or falls, the shareholder gains or falls. … The main advantage of mutual funds is they allow people to diversify. The value of any single stock or bond can greatly vary from day to day and year to year depending on the performance of one company. Therefore, holding only a single corporation’s stock or bond is very risky. People who hold a diverse portfolio of stocks and bonds ...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 26 of 36 Saving, Investment, and the Financial System Section 9 of 25 … The financial system consists of various financial institutions that coordinate money flow between savers and borrowers. Financial institutions are grouped into two categories 1 · financial markets, direct finance, including the bond market and the stock market 2 · financial intermediaries, indirect finance: including banks and mutual funds … 2 · Financial intermediaries are financial institutions through which savers can make funds available to borrowers. The term intermediary reflects the role of these institutions positioned between savers and borrowers. Two of the most important financial intermediaries are banks and mutual funds. … Banks In the case of the owner of a small grocery store who wants to finance an expansion of his business, his approach is different than of large corporati...