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Chapter 23

ECON 1010 Chapter Notes - Chapter 23: Loanable Funds, Nominal Interest Rate, Real Interest Rate


Department
Economics
Course Code
ECON 1010
Professor
Steven Edwards
Chapter
23

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Ch. 23 Finance, Saving, and Investment
Physical Capital vs. Financial Capital
Physical capital tools, instruments, machines, buildings, etc. that have been produced in the
past and are used today to produce goods and services
Financial capital the funds used to buy physical capital
Gross Investment total amount spent on a purchase of new capital and on replacing depreciated
capital
Depreciation the decrease in the quantity of capital from wear and tear
Net Investment the change in the quantity of capital
Net investment = gross investment depreciation
Wealth the value of all the things that people own
Saving the amount of income that is not paid in taxes or spent on consumption of goods and service
i.e. Total income + interest on previous savings taxes consumption expenditures
Three main markets for financial capital
Loan markets
Bond markets
Stock markets
Financial Institution a firm that operates on both sides of the markets both lending and borrowing
financial capital
A financial istitutio’s net worth = financial capital lent financial capital borrowed
Positive net worth institution is solvent (remains in business)
Negative net worth institution is insolvent (goes out of business)
Interest Rate on a financial asset is the interest received expressed as a percentage of the price of the
asset
Interest Rate = (Interest received/Price of asset) x 100%
If asset price rises, interest rate falls
If asset price falls, interest rate rises
The Loanable Funds Market the aggregate of all individual financial markets
Where those who have loanable funds sell to those who want loanable funds
The availability of loanable funds is determined by the national saving
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