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Lecture Money and capital markets: Chapter 21 – Peter S. Rose, Milton H.Marquis

The objective of this chapter is to understand fluctuations in inflation and real output and how central banks use conventional interest-rate policy to stabilize them. We will develop a macroeconomic model of fluctuations in the business cycle in which monetary policy plays a central role. | Chapter 21 Consumer Lending and Borrowing Learning Objectives To see the vital role played by consumers in supplying loanable funds through savings to the money and capital markets. To learn about the important role consumers play as major borrowers of funds and the laws that protect their rights. To explore the characteristics of consumer lending institutions. Introduction Many financial analysts have referred to the period since World War II as the age of consumer finance. Individuals and families have become the principal source of loanable funds flowing into the financial markets today. They also are one of the largest borrowing groups in the entire financial system. Consumers as Lenders of Funds Consumers as a group are among the most important lenders of funds in the economy. Loanable funds are supplied by consumers – individuals and families (households) – when they purchase financial assets from other units in the economy. Financial Assets Purchased by Consumers 21 - . | Chapter 21 Consumer Lending and Borrowing Learning Objectives To see the vital role played by consumers in supplying loanable funds through savings to the money and capital markets. To learn about the important role consumers play as major borrowers of funds and the laws that protect their rights. To explore the characteristics of consumer lending institutions. Introduction Many financial analysts have referred to the period since World War II as the age of consumer finance. Individuals and families have become the principal source of loanable funds flowing into the financial markets today. They also are one of the largest borrowing groups in the entire financial system. Consumers as Lenders of Funds Consumers as a group are among the most important lenders of funds in the economy. Loanable funds are supplied by consumers – individuals and families (households) – when they purchase financial assets from other units in the economy. Financial Assets Purchased by Consumers 21 - Financial Assets Purchased by Consumers 21 - Recent Innovations in Consumer Savings Instruments One of the most important trends affecting consumer savings and lending today is the explosion of new financial instruments. Many of these new instruments offer the consumer greater financial flexibility, as well as the potential for higher rates of return. Recent Innovations in Consumer Savings Instruments Examples: NOW accounts / share drafts automatic transfer services (ATS) share accounts at money market mutual funds consumer cash management services universal life insurance individual and Keogh Plan retirement accounts Roth and Education IRAs money market and market-index CDs variable-rate annuities and insurance plans Consumers as Borrowers of Funds Consumers as Borrowers of Funds Is Consumer Borrowing Excessive? Is Consumer Borrowing Excessive? The concept of a household portfolio effect argues that consumers may alter their level of spending until they once again feel comfortable