Saving, Investment, and the Financial System Chapter 26 Copyright © 2001 by Harcourt, Inc . All rights reserved.   Request...
The Financial System   <ul><li>The  financial system  consists of institutions that help to match one person’s saving with...
Financial Institutions  in the U.S. Economy <ul><li>Financial Markets </li></ul><ul><ul><li>Stock Market </li></ul></ul><u...
Other Financial Institutions   <ul><li>Credit unions </li></ul><ul><li>Pension funds </li></ul><ul><li>Insurance companies...
The Bond Market A  bond  is a certificate of indebtedness that specifies obligations of the borrower to the holder of the ...
Characteristics of a Bond <ul><li>Term:   The length of time until the bond matures. </li></ul><ul><li>Credit Risk:   The ...
Stock Market Basics <ul><li>What is Stock? </li></ul><ul><ul><li>A  stock  is a tradable security that a firm issues to ce...
<ul><li>Stock  represents ownership in a firm and is therefore, a claim to the profits that the firm makes. </li></ul><ul>...
The Stock Market The most important stock exchanges in the United States are the New York Stock Exchange, the American Sto...
The Stock Market <ul><li>Most newspaper stock tables provide the following information: </li></ul><ul><li>Price (of a shar...
Stock Market Basics <ul><li>Reading the Stock Market Report </li></ul><ul><ul><li>Figure 19.2 in the textbook shows a part...
The Market for Loanable Funds Loanable funds   refers to all income that people have chosen to save and lend out, rather t...
Loanable Funds (in billions of dollars) 0 Interest Rate Market for Loanable Funds... Demand Supply 5% $1,200
Government Policies That Affect Saving and Investment <ul><li>Taxes and saving </li></ul><ul><li>Taxes and investment </li...
An Increase in the Supply of Loanable Funds... Loanable Funds (in billions of dollars) 0 5% Supply,  S 1   $1,200 Demand H...
An Increase in the Demand for Loanable Funds... Loanable Funds (in billions of dollars) 0 5% $1,200 Supply Demand,  D 1   ...
Government Budget Deficits and Surpluses <ul><li>When the government spends more than it receives in tax revenues, the sho...
Government Budget Deficits and Surpluses <ul><li>Government borrowing to finance its budget deficit reduces the supply of ...
The Effect of a Government Budget Deficit... Loanable Funds (in billions of dollars) 0 $1,200 Supply,  S 1 Demand 5% Harco...
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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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  • Chapter 26-Saving, Investment and the Financial System

    1. 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. 2. The Financial System <ul><li>The financial system consists of institutions that help to match one person’s saving with another person’s investment. </li></ul><ul><li>It moves the economy’s scarce resources from savers to borrowers. </li></ul><ul><li>The financial system is made up of institutions(Markets and Intermediaries) </li></ul>
    3. 3. Financial Institutions in the U.S. Economy <ul><li>Financial Markets </li></ul><ul><ul><li>Stock Market </li></ul></ul><ul><ul><li>Bond Market </li></ul></ul><ul><li>Financial Intermediaries </li></ul><ul><ul><li>Banks </li></ul></ul><ul><ul><li>Mutual Funds </li></ul></ul>
    4. 4. Other Financial Institutions <ul><li>Credit unions </li></ul><ul><li>Pension funds </li></ul><ul><li>Insurance companies </li></ul><ul><li>Loan sharks </li></ul>
    5. 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. 6. Characteristics of a Bond <ul><li>Term: The length of time until the bond matures. </li></ul><ul><li>Credit Risk: The probability that the borrower will fail to pay some of the interest or principal. </li></ul><ul><li>Tax Treatment: The way in which the tax laws treat the interest on the bond. </li></ul><ul><ul><li>Municipal bonds are federal tax exempt. </li></ul></ul>
    7. 7. Stock Market Basics <ul><li>What is Stock? </li></ul><ul><ul><li>A stock is a tradable security that a firm issues to certify that the stockholder owns a share of the firm. </li></ul></ul><ul><ul><li>Figure 19.1 shows an example of a stock certificate. </li></ul></ul>
    8. 8. <ul><li>Stock represents ownership in a firm and is therefore, a claim to the profits that the firm makes. </li></ul><ul><li>The sale of stock to raise money is called equity financing . </li></ul><ul><ul><li>Compared to bonds, stocks offer both higher risk and potentially higher returns. </li></ul></ul>The Stock Market
    9. 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. 10. The Stock Market <ul><li>Most newspaper stock tables provide the following information: </li></ul><ul><li>Price (of a share) </li></ul><ul><li>Volume (number of shares sold) </li></ul><ul><li>Dividend (profits paid to stockholders) </li></ul><ul><li>Price-earnings ratio </li></ul>
    11. 11. Stock Market Basics <ul><li>Reading the Stock Market Report </li></ul><ul><ul><li>Figure 19.2 in the textbook shows a part of a page from of the Wall Street Journal. </li></ul></ul>
    12. 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. 13. Loanable Funds (in billions of dollars) 0 Interest Rate Market for Loanable Funds... Demand Supply 5% $1,200
    14. 14. Government Policies That Affect Saving and Investment <ul><li>Taxes and saving </li></ul><ul><li>Taxes and investment </li></ul><ul><li>Government budget deficits </li></ul>
    15. 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. 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. 17. Government Budget Deficits and Surpluses <ul><li>When the government spends more than it receives in tax revenues, the short fall is called the budget deficit . </li></ul><ul><ul><li>For 2003, the budget deficit is $307 billion </li></ul></ul><ul><li>The accumulation of past budget deficits is called the government debt . </li></ul><ul><ul><li>For 2003, the total debt is 6.7 trillion. </li></ul></ul>
    18. 18. Government Budget Deficits and Surpluses <ul><li>Government borrowing to finance its budget deficit reduces the supply of loanable funds available to finance investment by households and firms. </li></ul><ul><li>This fall in investment is referred to as crowding out. </li></ul><ul><ul><li>The deficit borrowing crowds out private borrowers who are trying to finance investments. </li></ul></ul>
    19. 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%

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