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Chapter 10. Savings and Investment
Link to syllabus
The discussion about the Financial System (pp. 291-304) might have
been a bit shorter, but it is very important material in today’s world.
Savings-Investment Identity (p. 277)
Ignore government and foreign trade:
Income = Consumption + Savings
Expenditures = Consumption + Investment
So, Savings=investment
Key Keynesian insight: savers and investors are different economic
people, and are affected by different economic factors.
e.g. Consumption/saving affected by income, future plans, interest rates.
Business investment affected by profitability.
With gov’t and trade,
Investment = Savingspersonal + (Taxes-Gov. Spend) + capital inflows.
Savings-Investment Identity: US and Japan Fig.10-1, p.279
Shows how capital inflows (or outflows) combine with private
savings to finance domestic investment.
Year is 2007 – pre-crisis.
Global Data: Savings Rates, 2007. p. 280
U.S. has relatively low savings rates.
The Demand for Loanable Funds. Fig 10-2, p. 281
Depends on:
Opportunities for business investments
Financing of government deficits
The Supply of Loanable Funds. Fig 10-3 p. 283
Depends on:
Individuals’ savings habits
International loans
Equilibrium in the Loanable Funds Market. Fig 10-4 p. 284
An Increase in the Demand for Loanable Funds. Fig. 10-5 p. 286.
Standard example; increased government deficit, financed internally
An Increase in the Supply of Loanable Funds. Fig 10-6 p. 287
Example: people decide to save more, consume less.
The Fisher Effect. Figure 10-7 p. 289.
(How a change in expected inflation increases the nominal interest
rate).
Irving Fisher. 1867-1947
Irving Fisher was one of the earliest American neo-classical
c
economists, of unusual mathematical sophistication.
( 1) his contributions to the Walrasian theory of equilibrium
price (he also invented the indifference curve device)
in 1892; 2) His volumes on the theory of capital and
I
investment (1896, 1898, 1906, 1907, 1930) which
brought the Austrian intertemporal theories into the Englishspeakin
speaking world, wherein he introduced the famous distinction
between "stocks" and flows", the Fisher Separation Theorem and the loanable funds
theory of interest rates. 3) his famous resurrection of the quantity theory of money (1911
1932, 1935); (4) the theory of index numbers (1922);
This Yale economist was an eccentric and colorful figure. When Irving Fisher wrote his
1892 dissertation, he constructed a remarkable machine equipped with pumps, wheels,
levers and pipes in order to illustrate his price theory. Socially, he was an avid advocate
of eugenics and health food diets. He made a fortune with his visible index card system known today as the rolodex - and advocated the establishment of an 100% reserve
requirement banking system His fortune was lost and his reputation was severely marred
by the 1929 Wall Street Crash, when just days before the crash, he was reassuring
investors that stock prices were not overinflated but, rather, had achieved a new,
Changes in US Interest Rates, Figure 10-8 p. 290
Illustrates that sometimes interest rates are increased by expected
inflation, and other times other factors dominate.
The US Housing Bubble. Fig 10-9 p. 303