Microeconomics Chapter8.pptxVIP

N. Gregory Mankiw In this chapter, look for the answers to these questions: What are the main types of financial institutions in the U.S. economy, and what is their function? What are the three kinds of saving? What’s the difference between saving and investment? How does the financial system coordinate saving and investment? How do govt policies affect saving, investment, and the interest rate? Financial Institutions The financial system: the group of institutions that helps match the saving of one person with the investment of another. Financial markets: institutions through which savers can directly provide funds to borrowers. Examples: The Bond Market. A bond is a certificate of indebtedness. The Stock Market. A stock is a claim to partial ownership in a firm. Financial Institutions Financial intermediaries: institutions through which savers can indirectly provide funds to borrowers. Examples: Banks Mutual funds – institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds The Financial Crisis of 2008–2009 A financial crisis led to a deep recession in the U.S. and around the world. A few unemployment rates: FYI: Elements of Financial Crises Large decline in some asset prices 2008–2009: Housing prices fell 30%. Insolvencies at financial institutions 2008–2009: Banks and other institutions failed when many homeowners stopped paying their mortgages. Decline in confidence in financial institutions 2008–2009: Customers with uninsured deposits began pulling their funds out of financial institutions. FYI: Elements of Financial Crises Credit crunch 2008–2009: Borrowers unable to get loans because troubled lenders not confident in borrowers’ credit-worthiness. Economic downturn 2008–2009: Failing financial institutions and a fall in investment caused GDP to fall and unemployment to rise. Vicious circle 2008–2009: The downturn reduced profits and asset values, which worsened the crisis. Differen