This chapter examines how the financial system works. First, we discuss the large variety of institutions that make up the financial system in our economy. Second, we discuss the relationship between the financial system and some key macroeconomic variables notably saving and investment. Third, we develop a model of the supply and demand for funds in financial markets. | Review of the previous lecture Shortcomings of GDP Factor prices are determined by supply and demand in factor markets. As a factor input is increased, its marginal product falls (other things equal). Lecture 15 Saving, investment and financial system Instructor: Abbas Course code: ECO 400 Lecture Outline The Financial System Saving And Investment In The National Income Accounts The Market For Loanable Funds The Financial System The financial system consists of the group of institutions in the economy 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 financial institutions that coordinate the actions of savers and borrowers. Financial institutions can be grouped into two different categories: financial markets and financial intermediaries Financial markets are the institutions through which savers can directly provide funds to borrowers. Financial | Review of the previous lecture Shortcomings of GDP Factor prices are determined by supply and demand in factor markets. As a factor input is increased, its marginal product falls (other things equal). Lecture 15 Saving, investment and financial system Instructor: Abbas Course code: ECO 400 Lecture Outline The Financial System Saving And Investment In The National Income Accounts The Market For Loanable Funds The Financial System The financial system consists of the group of institutions in the economy 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 financial institutions that coordinate the actions of savers and borrowers. Financial institutions can be grouped into two different categories: financial markets and financial intermediaries Financial markets are the institutions through which savers can directly provide funds to borrowers. Financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers. The Financial System Financial Markets The Bond Market A bond is a certificate of indebtedness that specifies obligations of the borrower to the holder of the bond. 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. The Financial System The Stock Market Stock represents a claim to partial 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 Financial System The most important stock exchanges in the United States are the New York Stock Exchange, the American Stock Exchange,
