Physical Capital: a real productive resource
Financial Capital: funds used to buy capital
FinancialAssets: stocks, bonds, short-term security
Interest Rate: percentage of financial assets
If price of financial assets falls, then interest rate falls.
e.g) If mutual fund decreases, so does the interest rate.
Market for loadable funds: any funds that the government and society would provide and
investors would buy.
Crowding effect: if government enters into market, they take up room, leaving less room for
Funds that finance investment:
1) Household Savings: society lends (bank) out their disposable income to make interest.
2) Government budget surplus:
- Surplus = supply increase
- Deficit = demand decrease
3) Borrowing from the rest of the world:
- Export more than import = net lender
- Import more than export = net borrower
- Net taxes = taxes paid to government – subsidies
Investment (I) = household/private savings (S) + [Taxes (T) – Government expenditure (G)] +
[Imports (M) – Exports (X)]
• If T > G = surplus, if G > T = deficit
• S + (T-G) = national savings; (X-M) = rest of the world
- C = b(1-t) + a
- t = tax rate; T= total taxes
Investments = househ