Financial Institutions and Markets in Crisis: Role in Saving and Investment, Study notes of Economics

Download Financial Institutions and Markets in Crisis: Role in Saving and Investment and more Study notes Economics in PDF only on Docsity! CHAPTER 13 Saving, Investment, and the Financial System In this chapter, look for the answers to these questions: The Financial Crisis of 2008–2009 • A financial crisis led to a deep recession in the U.S. and around the world. A few unemployment rates: 12 -2 00 7 01 -2 00 8 02 -2 00 8 03 -2 00 8 04 -2 00 8 05 -2 00 8 06 -2 00 8 07 -2 00 8 07 -2 00 8 08 -2 00 8 09 -2 00 8 10 -2 00 8 11 -2 00 8 12 -2 00 8 01 -2 00 9 02 -2 00 9 03 -2 00 9 04 -2 00 9 05 -2 00 9 06 -2 00 9 07 -2 00 9 08 -2 00 9 09 -2 00 9 10 -2 00 9 11 -2 00 9 12 -2 00 93 4 5 6 7 8 9 10 11 USA France U.K. Canada Sweden % o f l ab or fo rc e FYI: Elements of Financial Crises FYI: Elements of Financial Crises Oe Saving and Investment Recall the national income accounting identity: Oe Budget Deficits and Surpluses Budget surplus Budget deficit A. C a l c u l a t i o n s • Suppose GDP equals $10 trillion, consumption equals $6.5 trillion, the government spends $2 trillion and has a budget deficit of $300 billion. • Find public saving, taxes, private saving, national saving, and investment. B . A n s w e r s C . D i s c u s s i o n Q u e s t i o n s The two scenarios from this exercise were: 1. Consumers save the full proceeds of the tax cut. 2. Consumers save 1/4 of the tax cut and spend the other 3/4. • Which of these two scenarios do you think is more realistic? • Why is this question important? The Meaning of Saving and Investment • Private saving • Examples of what households do with saving: The Market for Loanable Funds The Market for Loanable Funds The Slope of the Supply Curve Interest Rate Loanable Funds ($billions) Supply 60 3% 80 6% Equilibrium Interest Rate Loanable Funds ($billions) Demand Supply 5% 60 Policy 1: Saving Incentives Interest Rate Loanable Funds ($billions) D1 S1 5% 60 S2 4% 70 Policy 2: Investment Incentives Interest Rate Loanable Funds ($billions) D1 S1 5% 60 6% 70 D2 Budget Deficits, Crowding Out, and Long-Run Growth >... The U.S. Government Debt 1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010 0% 20% 40% 60% 80% 100% 120% U.S. Government Debt as a Percentage of GDP, 1970–2010 Revolutionary War Civil War WW1 WW2 63.6% in 2010