Module 22
Saving,
Investment, and
the Financial System
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• The relationship between savings and
investment spending
• The purpose of the four principal types of
financial assets: stocks, bonds, loans and
bank deposits
• How financial intermediaries help
investors achieve diversification
Matching up Savings and
Investment Spending
• Physical Capital
• The Source of Physical
Capital
The Savings-Investment Spending Identity
• Assume a simple economy
• Total Income = Total Spending
• Total Income = Consumption + Savings
• Total Spending = Consumption+ Investment
• Consumption + Savings = Consumption +
Investment .: Savings = Investment
The Savings-Investment Spending Identity
• Now, more complexity
•Budget Surplus
•Budget Deficit
•Budget Balance
•National Savings v. Private Savings
•Capital inflow
The Financial System
• Wealth
• Financial Asset
• Physical Asset
• Liability
Three Tasks of a Financial System
• Reducing Transaction Costs
• Reducing Risk
• Financial Risk
• Diversification
• Providing Liquidity
• Liquid
• Illiquid
Types of Financial Assets
• Loans
• Bonds
• Default
• Loan-backed Securities (Collateralized Debt
Obligation - CDO)
• Stocks
Financial Intermediaries
• Mutual Funds
• Pension Funds
• Life Insurance Companies
• Banks
• Bank deposit
• Fractional reserve banking