CHAPTER 26
Savings, Investment Spending, and the
Financial System
PowerPoint® Slides
by Can Erbil
© 2005 Worth Publishers, all rights reserved
What you will learn in this chapter:
The relationship between savings and investment spending
About the loanable funds market, which shows how savers
are matched with borrowers
The purpose of the four principal types of assets: stocks,
bonds, loans, and bank deposits
How financial intermediaries help investors achieve
diversification
Some competing views of what determines stock prices and
why stock market fluctuations can be a source of
macroeconomic instability
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The Savings–Investment Spending Identity in a
Closed Economy
In a closed economy: GDP = C + I + G
SPrivate = GDP + TR − T − C
SGovernment = T − TR − G
NS = SPrivate + SGovernment = (GDP + TR − T − C) + (T − TR − G)
= GDP − C − G
Hence, I = NS
Investment spending = National savings in a closed
economy
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Budget Surplus and Budget Deficit
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The Savings–Investment Spending Identity
in an Open Economy
I = SPrivate + SGovernment + (IM – X) = NS + KI (10)
Investment spending = National savings + Capital inflow
in an open economy
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The Savings-Investment Spending Identity in
Open Economies: the United States and Japan
2003
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The Demand for Loanable Funds
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The Supply for Loanable Funds
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Equilibrium in the Loanable Funds Market
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Savings, Investment Spending, and
Government Policy
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Increasing Private Savings
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The Financial System - Definitions
 Wealth
 Financial asset
 Physical asset
 Liability
 Transaction costs
 Financial risk
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Risk-Averse Attitudes Toward Gain and Loss
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Three Tasks of a Financial System
Reducing transaction costs
Reducing financial risk
Providing liquid assets
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Financial Intermediaries
 Mutual funds
 Pension funds
 Life insurance companies
 Banks
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Financial Fluctuations
Financial market fluctuations can be a source of
macroeconomic instability.
Are markets irrational?
Policy makers assume neither that markets always
behave rationally nor that they can outsmart them.
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The End of Chapter 26
coming attraction:
Chapter 27:
Aggregate Supply and
Aggregate Demand
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