Textbook Notes (368,164)
Canada (161,688)
UOIT (554)
Economics (13)
ECON 2020U (13)
Chapter 8

Principles of Macro [Mankiw, Kneebone, McKenzie] - Chapter 8 Notes

4 Pages
50 Views
Unlock Document

School
Department
Economics
Course
ECON 2020U
Professor
Peter Cheung
Semester
Winter

Description
ECON2020_Chapter 8 Notes ~~~ SAVING, INVESTMENT, AND THE FINANCIA L SYSTEM ~~~ - Financial System > the group of institutions in the economy that help to matc h one person's saving with another person's investment ~!~ Financial Institutions and the Canadian Economy ~!~ - the purpose of the financial system is to move the money that some peo ple want to save into the hands of other people who want to borrow ~!~ Financial Markets ~!~ - Financial markets > the institutions through which a person who wants to save can directly supply funds to a person who wants to borrow - Two most important financial markets in Canadian economy are s tocks and bonds THE BOND MARKET - Bond > a certificate of indebtedness - Selling bonds to raise money is called debt finance - Date of maturity > the time by which the loan taken out (bond) will be repaid - A buyer can hold a bond until the date of maturity or sell it to someone else - The government usually issues bonds to build schools, fund the militar y, build infrastructure, etc. - Two characteristcs are important in a bond: - Term > the length of time until the bond matures - Perpetuity > a bond that never matures, but rather pay s interest for eternity, never repaying the principal - Credit Risk > the probability that the borrower will fail to p ay some of the interest or principal -If an institution fails to pay interest or repay a bond , they are said to be in default - Bonds which are sold with a long term and a high credit risk p ay out the highest interest - These bonds sold from shaky corporations are called ju nk bonds THE STOCK MARKET - Stock > a claim to partial ownership in a firm - Selling stocks to raise money is called equity finance - Stocks are paid after bonds because a bond is not ownership in the com pany; rather, it is funding the company at a price of interest - Because stocks are a claim to partial ownership, the owners mu st first pay out to their financers, then pocket any profit - Stocks are inherently risky compared to bonds and generally have the p otential to pay out much higher - The prices at which stocks buy and sell are dependant on the desire of traders to hold the stock - If there is little faith in a stock, the prices will fall (lik e supply and demand) - Stock index > an average of a group of stock prices based on the stock prices of 30 major US companies ~!~ Financial Intermediaries ~!~ - Financial intermediaries > financial institutions through which savers can indirectly provide funds to borrowersBANKS - Small companies do not sell stocks of their company on the TSX or NASD AQ, but go to a local bank for a loan instead - It is hard to gain interest in a small company to sell stocks, but it is easy to get a loan from a bank - The primary job of banks in to take in money that people want to save and use it to fund other people who want to borrow MUTUAL FUNDS - Mutual fund > an institution that sells shares to the public and uses te proceeds to buy a portfolio of stocks and bonds - Portfolio > an arrangement of several stocks and bonds purchased all t ogether as a package - this allows for people with small amounts of money to diversif y - 'Don't put all your eggs in one basket' - Mutual funds also give ordinary people access to the skills of profess ional money managers because the people themselves don't assemble these portfoli os - Index funds > mutual funds that purchase all of the stock in a certain index ~!~ Saving and Investment in the National Income Accounts ~!~ SOME IMPORANT IDENTITIES Y = C + I + G + NX - GDP Identity where Y is GDP, C = Consumption, I = Investment, G = Gove rnment expenditure, NX = Net Export (Export-Import) For closed economy: Y = C + I + G - Closed economy GDP where Y is GDP, C = Consumption, I = Investment, G = Government expenditure National Saving > the total income in the economy that remains after pay ing for consumption and governm
More Less

Related notes for ECON 2020U

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit