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Saving,Investment and the FInancial System.docx

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Serge Nadeau

Saving, Investment and the Financial  System Financial Institutions in the Canadian Economy • Canadian financial system moves economy’s resources from savers to borrowers, both parties borrow/save for their own reasons. This financial system is made up of various financial institutions that help coordinate these savers and borrowers • The Office of the Superintendent of Financial Institutions is the primary regulator of federally regulated banks, insurance companies and pension plans in Canada • There are 2 categories of Financial institutions: Financial Markets (Institutions through which savers can directly supply funds to borrowers) Debt 1. The Bond Market is the market through which companies sell bonds financing ( certificate of indebtedness) . Bonds mature over the course of their term (or last forever in the case of a perpetuity). Long term bonds are riskier(but pay higher interest rates) as they have higher credit risk/ risk of default. Equity 2. The Stock Market is the market through which a company sells stock financing (a representation of partial ownership) which are then sold and traded on organized stock exchanges. The prices of these stocks are determined by supply and demand Financial Intermediaries (Financial institutions through which savers indirectly provide funds to borrowers) 1. Banks are the financial intermediaries with which people are the most familiar. Banks take in deposits that they pay interest on, and turn them into loans with slightly higher interest rates. Banks also facilitate the purchase of goods anf services by allowing people to write cheques against their deposits (medium of exchange) 2. Mutual Funds are institutions that sell shares to the public and use proceeds to buy a portfolio of stocks and bonds. These mutual funds allow people with small amounts of money to diversify with less risk than if they invested in one stock. Mutual funds also give normal people access to the expertise and skills of professional money managers Saving and Investment in the National Income Accounts Y= C + I + G + NX In a closed economy NX=0 Y = C + I + G The total income in the economy that remains after Y – C – G =
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