Lecture Principles of economics - Chapter 26: Saving, investment, and the financial system
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et Deficits and
Surpluses
• A budget surplus increases the supply of
loanable funds, reduces the interest rate, and
stimulates investment.
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Figure 5 The U.S. Government Debt
Percent
of GDP
120
World War II
100
80
60
Revolutionary
War
40
Civil
War
World War I
20
0
1790
1810
1830
1850
1870
1890
1910
1930
1950
1970
1990
2010
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Summary
• The U.S. financial system is made up of
financial institutions such as the bond market,
the stock market, banks, and mutual funds.
• All these institutions act to direct the resources
of households who want to save some of their
income into the hands of households and firms
who want to borrow.
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Summary
• National income accounting identities reveal
some important relationships among
macroeconomic variables.
• In particular, in a closed economy, national
saving must equal investment.
• Financial institutions attempt to match one
person’s saving with another person’s
investment.
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Summary
• The interest rate is determined by the supply
and demand for loanable funds.
• The supply of loanable funds comes from
households who want to save some of their
income.
• The demand for loanable funds comes from
households and firms who want to borrow for
investment.
Copyright © 2004 South-Western
Summary
• National saving equals private saving plus
public saving.
• A government budget deficit represents
negative public saving and, therefore, reduces
national saving and the supply of loanable
funds.
• When a government budget deficit crowds out
investment, it reduces the growth of
productivity and GDP.
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