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© 2007 Thomson South-Western The Goals of This Chapter • We discuss the large variety of institutions that make up the financial system (金融體系) in the economy. • We discuss the relationship between the financial system and two key macroeconomic variables: saving (儲蓄) and investment (投資). • We develop a model of the supply and demand for funds in financial markets. In the model, the interest rate is the price that adjusts to balance supply and demand. © 2007 Thomson South-Western Financial System • The financial system consists of the group of institutions in the economy that help to match one economic agent’s saving with another agent’s investment. • It moves the economy’s scarce resources (funds) from lenders (資金供給者,suppliers of funds) to borrowers (資金需求者, demanders for funds). © 2007 Thomson South-Western FINANCIAL INSTITUTIONS IN THE U.S. ECONOMY • The financial system is made up of financial institutions that coordinate the decisions of savers (lenders) and borrowers. • Financial institutions can be grouped into two different categories: – Financial markets (金融市場) – Financial intermediaries (金融中介機構) © 2007 Thomson South-Western FINANCIAL INSTITUTIONS IN THE U.S. ECONOMY • Financial markets are the institutions through which savers (lenders) can directly provide funds to borrowers. • Financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers. © 2007 Thomson South-Western Financial Markets cash Savers borrowers Holders of Securities Issuers of Securities stock or bonds © 2007 Thomson South-Western Financial Intermediarces • Bank Savers Loans Deposits Borrowers Banks Suppliers of funds Demanders for funds © 2007 Thomson South-Western Financial Intermediarces • Mutual Funds Savers Holders of Mutual funds Shares of Mutual funds Mutual Funds Holding Stock or bond Borrowers Demanders for funds © 2007 Thomson South-Western Financial Markets • Financial Markets according to the term of trading securities (有價證券到期期限) – Money Market (貨幣市場) – Capital Market (資本市場) • Financial Markets according to the types of trading securities – Stock Market (股票市場) – Bond Market (債券市場) © 2007 Thomson South-Western Financial Markets • The Bond Market • A bond is a certificate of indebtedness that specifies obligations of the issuer of the bond (the borrower) to the holder of the bond (the lender). • Characteristics of a Bond • Term (Maturity): The length of time until the bond matures. • Default Risk (違約風險): The probability that the borrower will fail to pay some of the interest or principal. • Tax Treatment: The way in which the tax laws treat the interest on the bond. © 2007 Thomson South-Western Financial Markets • The Stock Market • Stock represents a claim to partial ownership in a firm and is therefore, a claim to the profits that the firm makes. • The sale of stock to raise money for operations and investment is called equity financing. • Compared to bonds, stocks offer both higher risk and potentially higher returns. • The most important stock exchanges in the United States are the New York Stock Exchange, the American Stock Exchange, and NASDAQ. © 2007 Thomson South-Western Financial Markets • The Stock Market • Most newspaper stock tables provide the following information: • • • • Price (of a share) Volume (number of shares sold) Dividend (profits paid to stockholders, 股利) Price-earnings ratio (本益比) © 2007 Thomson South-Western The Revenue Curve for Bond 持有債劵收益 F 45o 0 F(本期應債還債權人的金額) 現金流量 © 2007 Thomson South-Western The Revenue Curve for Stock 持有股票收益 45o 0 F 現金流量 © 2007 Thomson South-Western Financial Intermediaries • Financial Intermediaries are financial institutions through which savers (lenders) can indirectly provide funds to borrowers. • Two of most important financial intermediaries are: • Banks (銀行) • Mutual Funds (共同基金) © 2007 Thomson South-Western Banks • They take deposits from agents who want to save and use the deposits to make loans to agents who want to borrow. • They pay depositors interest on their deposits and charge borrowers slightly higher interest on their loans. © 2007 Thomson South-Western Banks Banks facilitate the purchases of goods and services by allowing people to write checks against their deposits or to use ATM card to pay the bill. Banks help create a special asset called a medium of exchange (交易媒介). A medium of exchange is an item that people can easily use to engage in transactions. A bank’s role in providing a medium of exchange distinguishes it from many other financial institutions. © 2007 Thomson South-Western Mutual Funds • A mutual fund is an institution that sells shares to the public and uses the proceeds to buy a portfolio, of various types of stocks, bonds, or both. • Mutual funds allow people with small amounts of money to easily diversify. © 2007 Thomson South-Western Other Financial Institutions • • • • Credit unions Pension funds Insurance companies Loan sharks © 2007 Thomson South-Western SAVING AND INVESTMENT IN THE NATIONAL INCOME ACCOUNTS • Recall that GDP is both total income generated in an economy and total expenditure spent on the economy’s output of goods and services for a given period of time: Y = C + I + G + NX © 2007 Thomson South-Western Some Important Identities • Consider a closed economy – one that does not engage in international trade: Y = C + I + G, in which G is government consumption, and I is domestic investment, which consists of private investment ( I p ) and public investment ( I G ) . I I P IG © 2007 Thomson South-Western Some Important Identities • Subtract C and G from both sides of the above identity to yield: Y–C–G=I • The left hand side of the equation is the total income in the economy after paying for private consumption and government consumption. © 2007 Thomson South-Western Some Important Identities • Adding and Subtracting net tax revenues (T) on the left hand side of the above identity gives: [(Y – T) – C] + (T – G) = I, in which [(Y – T) – C] is private saving (民間儲蓄), and (T – G) is government (public) saving (政府儲蓄). The sum of the two savings called national saving (國民儲蓄). • Substituting S for the terms on the left-hand side of the above identity yields: S=I © 2007 Thomson South-Western Some Important Identities • National saving is equal to: S=I S=Y–C–G S = (Y – T – C) + (T – G) © 2007 Thomson South-Western The Meaning of Saving and Investment • National Saving • National saving is the total income in the economy that remains after paying for private consumption and government consumption. • Private Saving • Private saving is the amount of income that households have left after paying their taxes and paying for their consumption. • Private saving (= Y – T – C) © 2007 Thomson South-Western The Meaning of Saving and Investment • Government Saving (Public Saving) • Government saving is the amount of tax revenue that the government has left after paying for its consumption • Public saving = (T – G) • Budget deficit IG (T G) ( IG G) T © 2007 Thomson South-Western Budget Surplus and Deficit • If T > G+ I G , the government runs a budget surplus (預算賸餘) because it receives more money than it spends on consumption and investment. • If G > T + I G , the government runs a budget deficit (預算赤字) because it spends more money than it receives in tax revenue. © 2007 Thomson South-Western The Interpretation of Saving and Investment identity • For the closed economy as a whole, national saving must equal domestic investment: S=I • For the closed economy as a whole, private saving can be used to finance either government’s budget deficit (IG G T ) or private investment ( I P ). (Y T C ) ( IG G T ) I P © 2007 Thomson South-Western THE MARKET FOR LOANABLE FUNDS • Assume that the economy has only one financial market, called the market for loanable funds (可貸資金市場). • We want to this model to explain how financial markets coordinate the economy’s saving and investment. • The market for loanable funds is the market in which those who want to lend out their saving meet those who want to borrow to make investments. © 2007 Thomson South-Western The Loanable Funds Market Model • Government policy Government policy Savers Suppliers of funds (S) Loanable Funds Market Borrowers Demanders for funds (D) D=S determines equilibrium real interest rate and quantity of loans. © 2007 Thomson South-Western Supply and Demand for Loanable Funds • Loanable funds refers to all income that people have chosen to save and lend out, rather than use for their own consumption. • The supply of loanable funds comes from people who have extra income they want to save and firms. • This lending can occur directly, such as purchasing bonds from firms, or it can occur indirectly, such as making deposits in a bank. © 2007 Thomson South-Western Supply and Demand for Loanable Funds • The demand for loanable funds comes from households, firms and government that wish to borrow to make investments. • This demand includes families taking out mortgages to buy new homes, firms borrowing to buy new equipments or build factories, and government borrowing to finance its budget deficits. © 2007 Thomson South-Western Real Interest Rate is the price of funds • Real interest rate is the price of the loan, which represents the revenues that lenders receive on their saving (投資收益) and the amount that borrowers pay for loans (資金成本). • Because a high real interest rate makes borrowing more expensive, the quantity of loanable funds demanded falls as the real interest rate rises. • Because a high interest rate makes saving more attractive, the quantity of loanable funds supplied increases as the real interest rate rises. © 2007 Thomson South-Western Supply and Demand for Loanable Funds • The loanable funds market works much like other markets in the economy. • The real interest rate adjusts to balance the supply and demand for loanable funds. • The equality between the supply of loanable funds and the demand for loanable funds determines the equilibrium real interest rate. © 2007 Thomson South-Western The Market for Loanable Funds Interest Rate Supply 5% Demand 0 $1,200 Loanable Funds (in billions of dollars) © 2007 Thomson South-Western Supply and Demand for Loanable Funds • Government Policies That Affect Saving and Investment • Taxes and saving • Taxes and investment • Government budget deficits and surpluses © 2007 Thomson South-Western Policy 1: Saving Incentives • Taxes on interest income reduce the future payoff from (returns on) current saving and, as a result, reduce the incentive to save. • A tax decrease increases the incentive for households to save at any given interest rate. • The supply of loanable funds curve shifts right. • The equilibrium interest rate decreases. • The quantity demanded for loanable funds increases. © 2007 Thomson South-Western An Increase in the Supply of Loanable Funds Interest Rate Supply, S1 S2 1. Tax incentives for saving increase the supply of loanable funds . . . 5% 4% 2. . . . which reduces the equilibrium interest rate . . . Demand 0 $1,200 $1,600 Loanable Funds (in billions of dollars) 3. . . . and raises the equilibrium quantity of loanable funds. © 2007 Thomson South-Western Policy 1: Saving Incentives • If a change in tax law encourages saving, the result will be lower interest rates greater saving and hence greater investment. © 2007 Thomson South-Western Policy 2: Investment Incentives • An investment tax credit (投資租稅抵減) increases the incentive for firms to borrow. • Increases the demand for loanable funds. • Shifts the demand curve to the right. • Results in a higher interest rate, greater investments, and hence a greater quantity saved. © 2007 Thomson South-Western Policy 2: Investment Incentives • If a change in tax laws encourages greater investment, the result will be higher interest rates and greater saving. © 2007 Thomson South-Western Investment Incentives Increase the Demand for Loanable Funds Interest Rate Supply 1. An investment tax credit increases the demand for loanable funds . . . 6% 5% 2. . . . which raises the equilibrium interest rate . . . 0 D2 Demand, D1 $1,200 $1,400 Loanable Funds (in billions of dollars) 3. . . . and raises the equilibrium quantity of loanable funds. © 2007 Thomson South-Western Policy 3: Government Budget Deficits and Surpluses • When the government spends more on consumption and investment than it receives in tax revenues, the short fall is called the budget deficit. • The accumulation of past budget deficits is called the outstanding government debt (未償 還債務餘額). © 2007 Thomson South-Western Policy 3: Government Budget Deficits and Surpluses • Government borrowing to finance its budget deficit reduces the supply of loanable funds available to finance investment by households and firms. • This fall in investment is referred to as the effect of crowding out (排擠效果). • The deficit borrowing crowds out private borrowers who are trying to finance investments. © 2007 Thomson South-Western Policy 3: Government Budget Deficits and Surpluses • A budget deficit decreases the supply of loanable funds. • Shifts the supply curve to the left. • Increases the equilibrium interest rate. • Reduces the equilibrium quantity of loanable funds. © 2007 Thomson South-Western The Effect of a Government Budget Deficit Interest Rate S2 Supply, S1 1. A budget deficit decreases the supply of loanable funds . . . 6% 5% 2. . . . which raises the equilibrium interest rate . . . Demand 0 $800 $1,200 Loanable Funds (in billions of dollars) 3. . . . and reduces the equilibrium quantity of loanable funds. © 2007 Thomson South-Western Policy 3: Government Budget Deficits and Surpluses • When government reduces national saving by running a deficit, the interest rate rises and investment falls. • A budget surplus increases the supply of loanable funds, reduces the interest rate, and stimulates investment. © 2007 Thomson South-Western The U.S. Government Debt Percent of GDP 120 World War II 100 80 60 Revolutionary War Civil War World War I 40 20 0 1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010 © 2007 Thomson South-Western 個案研究:台灣政府財政赤字 1.政府歲出與歲入 ● 歲入: - 稅課收入(中央:稅課收入;地方:稅課收入及中 央統籌分配稅) - 非稅課收入(財產售價,規費及罰鍰收入) - 補助收入(中央政府對地方政府補助:一般型補助 以及計劃型補助) ● 歲出: - 經常門支出 - 資本門支出 © 2007 Thomson South-Western 2.預算收支平衡與財政赤字 ● 支出=歲出+還本數 ● 收入=歲入+賒借收入 ● 預算收支平衡:支出=收入 ● 由預算收支平衡,及預算收支定義可得: 歲出+還本數=歲入+賒借收入(舉借數) ● 財政赤字 =歲出-歲入 =舉借數(借)-還本數(還)+移用以前年度歲計賸餘 =未償還債務餘額增加數(欠)+移用以前年度歲計賸餘 © 2007 Thomson South-Western 3.賒借是財政管理的週轉工具 ● ● ● 財政赤字出現表示,政府須藉財務操作達到預算 收支平衡 政府財務操作工具: - 借:向外舉借或發行公債 - 還:還本金額 『公共債務法』對政府財務操作工具的限制: - 流量管制:賒借收入(借)不得超過該年度總預算 15%。 - 存量管制:未償還債務餘額(欠)不得超過前三年 名目GDP的一定比率。 - 強制還本:年度還本數(還)不得低於該年度稅課 收入的5%。 © 2007 Thomson South-Western 中央政府未償還債務餘額佔GNP比例圖 30 25 20 15 10 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 © 2007 Thomson South-Western Summary • The U.S. financial system is made up of financial institutions such as the bond market, the stock market, banks, and mutual funds. • All these institutions act to direct the resources of households who want to save some of their income into the hands of households and firms who want to borrow. © 2007 Thomson South-Western Summary • National income accounting identities reveal some important relationships among macroeconomic variables. • In particular, in a closed economy, national saving must equal investment. • Financial institutions attempt to match one person’s saving with another person’s investment. © 2007 Thomson South-Western Summary • The interest rate is determined by the supply and demand for loanable funds. • The supply of loanable funds comes from households who want to save some of their income. • The demand for loanable funds comes from households and firms who want to borrow for investment. © 2007 Thomson South-Western Summary • National saving equals private saving plus public saving. • A government budget deficit represents negative public saving and, therefore, reduces national saving and the supply of loanable funds. • When a government budget deficit crowds out investment, it reduces the growth of productivity and GDP. © 2007 Thomson South-Western