Download Section 5 Lecture

AP Macroeconomics
Section 5 Lecture
December 2016
Mr. Gammie
MONEY
Module 22: Saving, Investment, and
the Financial System
Simple Economy
Total Income = Total Spending
Total Spending =
You have $500 of disposable income for the
month of December. What can you do with it?
MPC + MPS = 1
Spend or Save
Some Math…
Total Income = Total Spending
Total Income = C + S
Total Spending = C + I
C+S=C+I
Therefore….. S = I
Savings = Investment
+ Government
Budget Balance
= tax revenue – gov’t spending – transfer
payments
Budget surplus (+)
Budget deficit (-)
National Saving = S + BB
+ Other Countries
Capital Inflow = the total inflow of foreign funds
minus the total outflow of domestic funds to
other countries
I=S
S = National Saving + Capital Inflow
Three Tasks of a Financial System
1. Reduce Transaction Costs
vs.
Three Tasks of a Financial System
2. Reducing Risk
Diversification: investing in several assets with
unrelated, or independent risks. It allows a business
owner to lower his/her total risk of loss.
Key Takeaway: The desire of individuals to reduce
their total risk by engaging in diversification is why
we have stocks and the stock market.
Three Tasks of a Financial System
3. Providing Liquidity
Financial Assets
Financial Asset: A paper claim that entitles the
buyer to future income from the seller.
Four Types:
1. Loans
2. Bonds
3. Loan Backed Securities
4. Stocks
Financial Intermediaries
Financial Intermediary: an institution that
transforms funds gathered from many
individuals in financial assets.
Three Key Types:
1. Mutual Funds
2. Pension Funds and Life Insurance Companies
3. Banks
Review Question
Economists view investment spending as which
of the following:
a. Stocks
b. Bonds
c. Spending on physical capital
d. Mutual investment spending
e. Spending on human capital
Review Question
Given: Closed Economy S=I
In a closed economy suppose that GDP is $12
trillion. Consumption is $8 trillion, government
spending is $2 trillion, and taxes are $0.5 billion.
How much is national saving?
a. $2 trillion
b. $3 trillion
c. $3.5 trillion
d. $4 trillion
e. None of the above
Review Questions
Financial markets:
a. Increase transaction costs
b. Reduce diversification
c. Provide liquidity
d. Determine tax rates
e. Are the same as resource markets
Module 22 Summary
• The saving investment identity tells us that, in a simple economy
without gov’t or foreign trade, that private dollars saved must equal
private dollars invested.
• When the gov’t is included we discover that they can also
contribute to the national savings if there is a budget surplus, and
can detract from national savings if there is a budget deficit.
• Money can also flow into Canada from foreign citizens and money
can flow out of Canada into foreign economies. This inflow or
outflow affects domestic saving and investment.
• If more money flows in to Canada than leaves Canada to other
nations, there is a capital inflow. This increases domestic
investment. (Vice versa applies).
• The financial system facilitates transactions between savers and
investors and provides three key roles in this process: reducing
transaction costs, reducing risk, and increasing liquidity.
Module 23: The Definition and
Measurement of Money
Define:
money
Defined:
money is any
asset that can easily be
used to purchase
goods and services.
Roles of Money
1. Medium of Exchange
Roles of Money
2. Store of Value
Roles of Money
3. Unit of Account
Types of Money
1. Commodity Money ex.
2. Commodity-backed Money ex.
3. Fiat Money ex.
Measuring the Money Supply
• M1: currency and coin in circulation +
checking deposits + travelers checks
• M2: M1 + savings accounts + short term CDs +
money market accounts
*Review this section in your textbook.
Review Question
Suppose you transfer $500 from your checking
account to your savings account. With this
transaction M1 _____ and M2 _____.
a. Increased; stayed the same
b. Stayed the same; increased
c. Decreased; stayed the same
d. Decreased; increased
e. Increased; decreased
Review Question
The narrowest definition of money excludes:
a. Savings accounts
b. Traveler’s checks
c. Currency in circulation
d. Checkable bank deposits
e. Coins in circulation
Review Question
The medium of exchange function means that
money is used:
a. As the common denominator of prices
b. As the common denominator of future
payments.
c. To save and earn interest income.
d. To accumulate purchasing power.
e. To pay for goods and services.
Module 23 Summary
• Money is not the same as wealth. Money is essentially
anything that is easily exchangeable for goods and
services.
• Many things have been used as money by different
human civilizations. All successful forms of money
must serve as a medium of exchange, a store of value,
and unit of account.
• Two aggregate measures of the money supply are M1
and M2.
• M1 is the narrowest definition. You will most often
work with this definition.
• M2 adds several other assets, known as near-moneys,
that can easily be converted into cash.