Chapter 13 of the macroeconomics text discusses the financial system, which connects savers with borrowers to facilitate investment and economic growth. Savers, who spend less than they earn, accumulate wealth through savings accounts, bonds, or stocks, while borrowers use funds for purposes like s...
THE FINANCIAL SYSTEM
● Definition
○ The group of institutions in the economy that help match one person’s
saving with another person’s investment
○ Transfers scarce resources from savers to borrowers
● Importance
○ Supports economic growth by allowing the borrowing of money
○ Instead of waiting to accumulate enough savings, people/firms can
borrow money to start businesses, make purchases, etc.
SAVING
● The Savers
○ Savers are people who spend less money than they earn.
○ In an economy, the savers are firms and households. They accumulate
savings via income that is not spent and store these savings in the
financial market.
○ The key difference between wealth and savings is that wealth
encompasses savings among all other assets, such as real-estate,
investments, etc.
● Reasons for Saving Money
○ Retirement:
■ preparing for when they will no longer actively earn income
○ College:
■ tuition for themselves or their children
○ Rainy day:
■ unexpected emergencies or disasters
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, ○ Big ticket expense:
■ vacation, new house, new car
● Ways to save money:
○ There are many ways savers may choose to store their money:
■ Savings Account
■ Government Bonds
■ Corporate Bonds
■ Stocks
■ Mutual Funds
● What to Do with Your Savings
○ People may choose to purchase stocks, bonds or other assets
○ This is because such assets offer a greater rate of return than cash in a
savings account
○ The interest on savings accounts are around 1% or less vs. the rate of
return from rent on properties and interest on bonds, etc.
BORROWING
● The Borrowers:
○ People who spend more money than they earn
● Reasons for Borrowing Money:
○ To start a new business or improve a current business (firms)
○ For big-ticket purchases (households)
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