Module Saving, Investment, and the Financial System KRUGMAN'S MACROECONOMICS for AP* 22 Margaret Ray and David Anderson

What you will learn in this Module : The relationship between savings and investment spending The purpose of the four principal types of financial assets: stocks, bonds, loans and bank deposits How financial intermediaries help investors achieve diversification

Physical Capital The Source of Physical Capital Matching up Savings and Investment Spending

The Savings-Investment Spending Identity Assume a simple economy Total Income = Total Spending Total Income = Consumption + Savings Total Spending = Consumption+ Investment Consumption + Savings = Consumption + Investment.: Savings = Investment

The Savings-Investment Spending Identity Now, more complexity Budget Surplus Budget Deficit Budget Balance National Savings v. Private Savings Capital inflow

Wealth Financial Asset Physical Asset Liability The Financial System

Three Tasks of a Financial System Reducing Transaction Costs Reducing Risk Financial Risk Diversification Providing Liquidity Liquid Illiquid

Types of Financial Assets Loans Bonds Default Loan-backed Securities (Collateralized Debt Obligation - CDO) Stocks

Financial Intermediaries Mutual Funds Pension Funds Life Insurance Companies Banks Bank deposit Fractional reserve banking