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Module Saving, Investment, and the Financial System

22. Module Saving, Investment, and the Financial System. KRUGMAN'S MACROECONOMICS for AP*. Margaret Ray and David Anderson. What you will learn in this Module :. The relationship between savings and investment spending

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Module Saving, Investment, and the Financial System

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  1. 22 ModuleSaving,Investment, andthe Financial System • KRUGMAN'S • MACROECONOMICS for AP* Margaret Ray and David Anderson

  2. What you will learnin thisModule: • 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

  3. Matching up Savings and Investment Spending • Investment Spending? • Spending by businesses on physical capital • Physical Capital ? • Machinery, tools, equipment, buildings • Source of Investment?

  4. The Savings-Investment Spending Identity • Assume a simple economy • (no government or foreign sector) • Total Income = Total Spending • Total Income = Consumption + Savings • Total Spending = Consumption+ Investment • Consumption + Savings = Consumption + Investment • Savings = Investment

  5. The Savings-Investment Spending Identity Now, more complexity • Budget Surplus = Positive Government Savings • Budget Deficit = Negative Government Savings • Budget Balance = Government Revenues – Spending • Private Savings = Household Savings + Business Savings • National Savings = Private Savings + Budget Balance • Capital inflow = Savings by foreigners

  6. The Savings-Investment Spending Identity With Government and Foreign Sector Investment = Private Savings + Budget Balance + Capital Inflows

  7. The Financial System Wealth • Financial Assets • Savings accounts • Stocks • Bonds • Physical Assets • Property • Gold or Silver • Art • Liability • Debt

  8. Three Tasks of a Financial System • Reducing Transaction Costs • Reducing Risk • Financial Risk • Diversification • Providing Liquidity

  9. Financial Markets and Financial Intermediaries Financial Markets • Stock Market • Bond Market Financial Intermediaries • Mutual Funds • Pension Funds • Life Insurance Companies • Banks

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