Podcast
Questions and Answers
What is meant by loanable funds in the context of private investment?
What is meant by loanable funds in the context of private investment?
- The savings held by banks for emergency loans.
- The flow of resources available to fund private investment. (correct)
- The cash reserves maintained by businesses for operations.
- The amount of money the government can directly invest.
How would a government budget deficit likely impact the supply of loanable funds?
How would a government budget deficit likely impact the supply of loanable funds?
- It has no impact on loanable funds.
- It reduces the supply of loanable funds. (correct)
- It increases the supply of loanable funds.
- It only impacts loanable funds for private investments.
What might happen to investment levels if Canadians increasingly adopt a 'live for today' mindset?
What might happen to investment levels if Canadians increasingly adopt a 'live for today' mindset?
- Investment levels might decrease due to reduced savings. (correct)
- Investment levels would remain constant.
- Investment levels are likely to increase significantly.
- Investment levels would be unaffected by consumer behavior.
What effect would an increase in interest rates likely have on the value of a portfolio?
What effect would an increase in interest rates likely have on the value of a portfolio?
What would be a likely effect of a depreciation of the Canadian dollar on an investment portfolio?
What would be a likely effect of a depreciation of the Canadian dollar on an investment portfolio?
What is the role of the financial system in the economy?
What is the role of the financial system in the economy?
How does saving contribute to economic growth?
How does saving contribute to economic growth?
Which of the following is a characteristic of bonds?
Which of the following is a characteristic of bonds?
What does equity finance involve?
What does equity finance involve?
What factors determine the prices of shares on stock exchanges?
What factors determine the prices of shares on stock exchanges?
Which of the following best describes financial markets?
Which of the following best describes financial markets?
What is the effect of higher capital on a country's productivity?
What is the effect of higher capital on a country's productivity?
How can individuals finance their capital investments?
How can individuals finance their capital investments?
What is public saving defined as?
What is public saving defined as?
How is national saving calculated?
How is national saving calculated?
If the government has a budget deficit, what can be inferred about public saving?
If the government has a budget deficit, what can be inferred about public saving?
In the first calculation, what was the value of public saving?
In the first calculation, what was the value of public saving?
If consumers saved the entire tax cut of $200 million, what would happen to national saving?
If consumers saved the entire tax cut of $200 million, what would happen to national saving?
What would be true if consumers only saved $50 million of the $200 million tax cut?
What would be true if consumers only saved $50 million of the $200 million tax cut?
What does the equation $S = I$ indicate?
What does the equation $S = I$ indicate?
In the first exercise, what was the total amount of private saving calculated?
In the first exercise, what was the total amount of private saving calculated?
What is the primary function of a bank?
What is the primary function of a bank?
What does national saving represent in a closed economy?
What does national saving represent in a closed economy?
Which of the following describes a mutual fund?
Which of the following describes a mutual fund?
How can national saving be expressed, considering government activities?
How can national saving be expressed, considering government activities?
What is the importance of indices like the Dow Jones Industrial Average?
What is the importance of indices like the Dow Jones Industrial Average?
Which statement about private saving is accurate?
Which statement about private saving is accurate?
In the context of financial institutions, what do financial intermediaries do?
In the context of financial institutions, what do financial intermediaries do?
Which of the following does NOT define a stock index?
Which of the following does NOT define a stock index?
Which scenario is more likely to occur when a tax cut is implemented?
Which scenario is more likely to occur when a tax cut is implemented?
What primarily drives the supply side of the market for loanable funds?
What primarily drives the supply side of the market for loanable funds?
How does a higher saving rate impact the economy according to the discussion?
How does a higher saving rate impact the economy according to the discussion?
What effect does an investment tax credit have on the market for loanable funds?
What effect does an investment tax credit have on the market for loanable funds?
Which of the following policies is designed to encourage saving?
Which of the following policies is designed to encourage saving?
What does the term 'crowding out' refer to in the context of government borrowing?
What does the term 'crowding out' refer to in the context of government borrowing?
Which statement best explains the distinction between government borrowing and private investor borrowing?
Which statement best explains the distinction between government borrowing and private investor borrowing?
What is the primary role of interest rates in the market for loanable funds?
What is the primary role of interest rates in the market for loanable funds?
Flashcards
Financial System
Financial System
A group of institutions matching savers' funds with borrowers' needs for investment.
Saving & Investment
Saving & Investment
Crucial to long-term economic growth; more saving leads to more investment and productivity.
Financial Markets
Financial Markets
Institutions where savers directly provide funds to borrowers.
Bond
Bond
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Bond's Term
Bond's Term
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Credit Risk
Credit Risk
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Stock
Stock
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Equity Finance
Equity Finance
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Stock Index
Stock Index
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Dow Jones Industrial Average
Dow Jones Industrial Average
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S&P/TSX Composite Index
S&P/TSX Composite Index
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Financial Intermediary
Financial Intermediary
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Bank
Bank
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Mutual Fund
Mutual Fund
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National Saving
National Saving
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Private Saving
Private Saving
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Public Saving
Public Saving
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Budget Deficit
Budget Deficit
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Budget Surplus
Budget Surplus
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Private Saving
Private Saving
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National Saving
National Saving
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Investment
Investment
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Saving vs. Investment
Saving vs. Investment
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Saving and Investment Relationship
Saving and Investment Relationship
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Loanable Funds
Loanable Funds
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Budget Deficit
Budget Deficit
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Live for Today
Live for Today
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Interest Rates
Interest Rates
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Portfolio
Portfolio
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Loanable Funds Market
Loanable Funds Market
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Supply of Loanable Funds
Supply of Loanable Funds
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Demand for Loanable Funds
Demand for Loanable Funds
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Interest Rate
Interest Rate
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Government Budget Deficits
Government Budget Deficits
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Crowding Out
Crowding Out
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Tax Cut - Consumer Savings
Tax Cut - Consumer Savings
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Saving Incentives
Saving Incentives
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Study Notes
PowerPoint Presentation: Principles of Macroeconomics
- The presentation is for the eighth Canadian edition of Principles of Macroeconomics by Mankiw/Kneebone/McKenzie
- The presentation was adapted for the eighth Canadian edition by Marc Prud'Homme, University of Ottawa
- Copyright 2020 by Nelson Education Ltd.
Chapter 8: Saving, Investment, and the Financial System
- Various ways to finance capital investments include borrowing from banks or individuals, or convincing someone to invest in exchange for future profits.
- The financial system is a group of institutions in an economy to match savings with investments.
Saving, Investment, and the Financial System
- Saving and investment are key to long-run economic growth.
- When a country saves a large portion of its GDP, more resources are available for investment in capital, increasing productivity and living standards.
- The chapter examines how the financial system operates.
Financial Institutions in the Canadian Economy
- Financial institutions can be grouped into financial markets and financial intermediaries.
Financial Markets
- Financial markets are institutions where savers directly provide funds to borrowers.
- A bond is a certificate of indebtedness specifying the borrower's obligation to the bondholder.
- Bond characteristics include term and credit risk.
- Stock represents ownership in a firm.
- Equity finance is the sale of a stock to raise funds.
- Stock prices are determined by supply and demand.
- Stock indexes (e.g. Dow Jones Industrial Average, S&P/TSX Composite Index) reflect likely future economic conditions.
Financial Intermediaries
- Financial intermediaries are institutions that indirectly provide funds to borrowers from savers
- Banks accept deposits and offer loans.
- Mutual funds sell shares to the public and use the proceeds to buy a portfolio of stocks and bonds, providing diversification and access to professional money management.
National Income Accounts
- Accounting details how various numbers are defined and summed.
- National income accounts include GDP and related statistics
Important Identities
- GDP (Y) = C + I + G + NX (where C = consumption, I = investment, G = government spending, NX = net exports)
- In a closed economy, NX = 0, so Y = C + I + G
- National saving (S) = Y - C - G, or (Y - T - C) + (T - G)
- Private saving is income left after taxes and consumption
- Public saving is government tax revenue left after spending
- Budget deficit: T < G
- Budget surplus: T > G
- Although saving and investment are equal for an economy as a whole, this doesn't necessarily hold for individuals and firms.
Active Learning (Calculations)
- Suppose GDP = 10billion,consumption=10 billion, consumption = 10billion,consumption=6.5 billion, government spending = 2billion,andthebudgetdeficit=2 billion, and the budget deficit = 2billion,andthebudgetdeficit=300 million
- Calculate taxes, private saving, national saving, and investment.
Active Learning (Part B Calculations)
- Government cuts taxes by $200 million.
- Consumers save full proceeds of tax cut, national saving is unchanged, investment unchanged
- Consumers save 1/4 of tax cut, and spend the other 3/4, then national saving and investment falls $150 million
Active Learning (Discussion Questions)
- The two scenarios are:
- Consumers save the full tax cut
- Consumers save ¼ of the tax cut
- Which is more realistic?
- Why is this important?
The Market for Loanable Funds
- The market for loanable funds facilitates the supply and demand of funds for saving and borrowing
- Saving is the source of loanable funds supply; investment is the source of demand for loanable funds.
- The interest rate is the price of a loan.
Policy 1: Saving Incentives
- Higher saving rates lead to higher GDP growth.
- People respond to saving incentives (e.g. RRSPs, TFSA, RESP, cons. Taxes like GST)
Policy 2: Investment Incentives
- Investment tax credit gives tax advantages for new factory or equipment purchases
Policy 3: Government Budget Deficits and Surpluses
- Government debt is sum of past budget deficits and surpluses.
- Crowding out is a reduction in investment caused by government borrowing
Classroom Activity
- Create a portfolio with $100,000 in savings,
- Calculate current portfolio holdings using newspaper prices;
- Identify objectives for the portfolio (short-term gain, long-term stability etc.)
- Explain how economic events might affect portfolio values (interest rate changes, recession, inflation, currency depreciation)
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Description
Test your knowledge on Chapter 8 of the eighth Canadian edition of Principles of Macroeconomics, focusing on savings, investments, and the financial system. Explore how financial institutions influence capital investment and the overall economy's growth.
