CHAPTER
Introduction and Overview
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1
Income greater than spending
SSUs
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Income
Spending
Spending
Income
SSUs and DSUs
Spending greater than income
DSUs
The Uses of Saving
TOTAL
SAVING
HOUSEHOLD SAVING
(Income not spent on consumption)
Surplus Funds available to be lent
in financial markets
Investment in newly constructed
houses
+
+
BUSINESS SAVING
(Income not distributed to the owners of the business firms)
Investment in new capital (plant
and equipment) and additions to
inventory
Surplus Funds
Available to be lent in financial
markets
=
INVESTMENT
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=
PLUS
SURPLUS FUNDS
The Financial System
DIRECT FINANCE
Surplus Spending Units
(Lenders)
Financial Markets
(Stock market, bond
Market, etc.)
Deficit Spending Units
(Borrowers)
INDIRECT FINANCE
Financial
Intermediaries (Banks,
savings and loan
associations, etc.)
Purchasing power flops one way
Legal obligations flow back
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Types of Financial Intermediaries
FINANCIAL
INTERMEDIARIES
Depository Institutions
Other Intermediaries
Commercial Banks
Life and Casualty
Savings and Loans
Insurance Companies
Credit Unions
Pension Funds
Mutual Savings Banks
Mutual Funds and Money
Market Mutual Funds
Finance Companies
Issue Checkable
Deposits
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Issue Other Financial
Claims
The Influence of the Fed’s
Monetary Policy
The Federal Reserve
Financial System
Economic Behavior
of households,
businesses,
governments, and
foreigners
Overall performance
or health of the
economy:
•Inflation
•Unemployment
•Growth
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Long-Run Economic Growth and
the Business Cycle
Peak
Total
Quantity of
Good and
Services
Produced
(Hypothetical)
Fluctuation of
the Economy
(Cycling)
LongTerm
Trend
Expansion
(Recovery)
Trough
Expansion
(Recovery)
Recession
(Contraction)
Year
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Average Inflation, Unemployment, and
Growth During Recent Decades
Inflation
Unemployment
Growth
(Output)
1960s
2.4%
4.75%
4.4%
1970s
7.0
6.25
3.2
1980s
5.5*
8.25
2.8
1990s
3.3
5.7**
3.7
2000-2001***
3.6
4.1
2.2
*Actually, if 1980 and 1981 are not considered, inflation averaged just under 4 percent for the remainder of the 1980s.
**From mid-1997 through the rest of the decade, unemployment was below 5 percent.
***Annualized through second quarter 2001 only.
SOURCE: http://www.stls.frb.org/fred/
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.