SAVING,INVESTMENT,ANDTHEFINANCIALSYSTEM.docVIP

Savings, Investment, and the Financial System Review Questions(2) ARSC 1432 Macroeconomics Co-Seminar SPRING 2009 Definition of financial system: the group of institutions in the economy that help to match one person’s saving with another person’s investment. Definition of financial markets: financial institutions through which savers can directly provide funds to borrowers. Definition of bond: a certificate of indebtedness. A bond identifies the date of maturity and the rate of interest that will be paid periodically until the loan matures. A bond identifies the date of maturity and the rate of interest that will be paid periodically until the loan matures. One important characteristic that determines a bond’s value is its term. The term is the length of time until the bond matures. All else equal, long-term bonds pay higher rates of interest than short-term bonds. Another important characteristic of a bond is its credit risk, which is the probability that the borrower will fail to pay some of the interest or principal. All else equal, the more risky a bond is, the higher its interest rate. Definition of stock: a claim to partial ownership in a firm The sale of stock to raise money is called equity finance; the sale of bonds to raise money is called debt finance Definition of financial intermediaries: financial institutions through which savers can indirectly provide funds to borrowers Definition of mutual fund: an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds. Closed Economy Savings equal Investment Definition of national saving (saving): the total income in the economy that remains after paying for consumption and government purchases We can add taxes (T) and subtract taxes (T) The first part of this equation (Y – T – C) is called private saving; the second part (T – G) is called public saving. Definition of private