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Chapter 26-Saving, Investment and the Financial System
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Chapter 26-Saving, Investment and the Financial System

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  • Have the students bring today’s WSJ to class. Walk them through each build of the slide.
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    • 1. Saving, Investment, and the Financial System Chapter 26 Copyright © 2001 by Harcourt, Inc . All rights reserved.   Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.
    • 2. The Financial System
      • The financial system consists of institutions that help to match one person’s saving with another person’s investment.
      • It moves the economy’s scarce resources from savers to borrowers.
      • The financial system is made up of institutions(Markets and Intermediaries)
    • 3. Financial Institutions in the U.S. Economy
      • Financial Markets
        • Stock Market
        • Bond Market
      • Financial Intermediaries
        • Banks
        • Mutual Funds
    • 4. Other Financial Institutions
      • Credit unions
      • Pension funds
      • Insurance companies
      • Loan sharks
    • 5. The Bond Market A bond is a certificate of indebtedness that specifies obligations of the borrower to the holder of the bond. IOU
    • 6. Characteristics of a 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 or principal.
      • Tax Treatment: The way in which the tax laws treat the interest on the bond.
        • Municipal bonds are federal tax exempt.
    • 7. Stock Market Basics
      • What is Stock?
        • A stock is a tradable security that a firm issues to certify that the stockholder owns a share of the firm.
        • Figure 19.1 shows an example of a stock certificate.
    • 8.
      • Stock represents ownership in a firm and is therefore, a claim to the profits that the firm makes.
      • The sale of stock to raise money is called equity financing .
        • Compared to bonds, stocks offer both higher risk and potentially higher returns.
      The Stock Market
    • 9. The Stock Market The most important stock exchanges in the United States are the New York Stock Exchange, the American Stock Exchange, and NASDAQ.
    • 10. The Stock Market
      • Most newspaper stock tables provide the following information:
      • Price (of a share)
      • Volume (number of shares sold)
      • Dividend (profits paid to stockholders)
      • Price-earnings ratio
    • 11. Stock Market Basics
      • Reading the Stock Market Report
        • Figure 19.2 in the textbook shows a part of a page from of the Wall Street Journal.
    • 12. The Market for Loanable Funds Loanable funds refers to all income that people have chosen to save and lend out, rather than use for their own consumption.
    • 13. Loanable Funds (in billions of dollars) 0 Interest Rate Market for Loanable Funds... Demand Supply 5% $1,200
    • 14. Government Policies That Affect Saving and Investment
      • Taxes and saving
      • Taxes and investment
      • Government budget deficits
    • 15. An Increase in the Supply of Loanable Funds... Loanable Funds (in billions of dollars) 0 5% Supply, S 1 $1,200 Demand Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. S 2 1. Tax incentives for saving increase the supply of loanable funds... Interest Rate $1,600 3. ...and raises the equilibrium quantity of loanable funds. 4% 2. ...which reduces the equilibrium interest rate...
    • 16. An Increase in the Demand for Loanable Funds... Loanable Funds (in billions of dollars) 0 5% $1,200 Supply Demand, D 1 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Interest Rate 1. An investment tax credit increases the demand for loanable funds... D 2 6% 2. ...which raises the equilibrium interest rate... $1,400 3. ...and raises the equilibrium quantity of loanable funds.
    • 17. Government Budget Deficits and Surpluses
      • When the government spends more than it receives in tax revenues, the short fall is called the budget deficit .
        • For 2003, the budget deficit is $307 billion
      • The accumulation of past budget deficits is called the government debt .
        • For 2003, the total debt is 6.7 trillion.
    • 18. Government Budget Deficits and Surpluses
      • Government borrowing to finance its budget deficit reduces the supply of loanable funds available to finance investment by households and firms.
      • This fall in investment is referred to as crowding out.
        • The deficit borrowing crowds out private borrowers who are trying to finance investments.
    • 19. The Effect of a Government Budget Deficit... Loanable Funds (in billions of dollars) 0 $1,200 Supply, S 1 Demand 5% Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. S 2 1. A budget deficit decreases the supply of loanable funds... Interest Rate $800 3. ...and reduces the equilibrium quantity of loanable funds. 2. ...which raises the equilibrium interest rate... 6%