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2-Summary L 6

- Macroeconomics

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9 views6 pages

2-Summary L 6

- Macroeconomics

Uploaded by

demro channel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Financial Markets:

1- Finance and Money


Finance: - describes the activity of providing the funds that finance expenditures on capital.
Money: - is what we use to pay for goods and services and factors of production and to make financial transactions.

2-Physical Capital and Financial Capital

Physical capital (Capital): ( the tools, instruments, machines, buildings)


Financial capital: The funds that firms use to buy physical capital

Capital and Investment:


- Gross investment is the total amount spent on purchases of new capital and on replacing depreciated capital.
- Depreciation is the decrease in the quantity of capital that results from wear and tear and obsolescence.
- Net investment = Gross investment – Depreciation

Wealth and Saving (Saving increases wealth)


- Wealth is the value of all the things that people own.
- Saving is the amount of income that is not paid in taxes or spent on consumption goods and services.

capital gains = when the market value of assets rises, wealth increases.

capital losses = when the market value of assets falls, wealth decreases.

National wealth= the wealth at the start of the year + saving


Saving = income - consumption expenditure

Financial Capital Markets

Loan Markets
- Businesses often want short-term finance to buy inventories or to extend credit to their customers.
- Households often want funds to purchase big-ticket items, such as automobiles or household
furnishings and appliances. They get these funds as bank loans, often in the form of outstanding credit
card balances.
- Households also get finance to buy new homes. These funds are usually obtained as a loan that is
secured by a mortgage—a legal contract that gives ownership of a home to the lender in the event that
the borrower fails to meet the agreed loan payments.

Bond Markets
- A bond is a promise to make specified payments on specified dates.
- Bonds issued by corporations and governments are traded in the bond market.
- The Government issues promises of this type, called Treasury bills.
- Mortgage-backed Security: Mortgage lenders sell securities to obtain funds and make mortgage loans.

Stock Markets
- A stock is a certificate of ownership and claim to the firm’s profits.
- A stock market is a financial market in which shares of stocks of corporations are traded.
- A financial institution is a firm that operates on both sides of the markets for financial capital.
- The financial institution is a borrower in one market and a lender in another.

The key financial institutions are:

Banks - Credit unions - Mutual funds - Pension funds -Insurance companies

Insolvency and Illiquidity


- A financial institution’s net worth =

= the market value of what it has lent - the market value of what it has borrowed.

- If net worth is positive, the institution is solvent. - If net worth is negative, the institution is insolvent.

Interest Rates and Asset Prices

Example:
A bond that promises to pay its holder $5 a year forever. You could buy this bond for $50.
Interest rate = ($5 / $50) * 100 = 10 percent
But if the price of this bond increased to $200:
Interest rate = ($5 / $200) * 100 = 2.5 percent

Present Value = Future amount / (1 + r)n , n = future years r = interest rate


The Loanable Funds Market

1. An increase in expected profit increases


investment and shifts the demand for loanable
funds curve rightward to DLF1

2. A decrease in expected profit decreases


investment and shifts the demand for loanable
funds curve leftward to DLF2.

1. The supply for loanable funds curve


increases and shifts rightward to SLF1 when
savings increase due to:
- Increase in disposable income
- Decrease in expected future income, or
wealth, or default risk.

2. The supply for loanable funds curve


decreases and shifts leftward to SLF2 when
savings fall due to:
- Decrease in disposable income
- Increase in expected future income, or
wealth, or default risk.
equilibrium real interest rate

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