1. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. CHAPTER 1 Introduction and Overview

2. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. SSUs and DSUs Income greater than spending SSUs Spending greater than income DSUs Income Spending

3. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Uses of Saving (Income not distributed to the owners of the business firms) (Income not spent on consumption) Surplus Funds available to be lent in financial markets Investment in newly constructed houses Investment in new capital (plant and equipment) and additions to inventory Surplus Funds Available to be lent in financial markets TOTAL SAVING HOUSEHOLD SAVING = INVESTMENTPLUSSURPLUS FUNDS BUSINESS SAVING +

4. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Financial System Surplus Spending Units (Lenders) Financial Markets (Stock market, bond Market, etc.) Deficit Spending Units (Borrowers) DIRECT FINANCE INDIRECT FINANCE Financial Intermediaries (Banks, savings and loan associations, etc.) Purchasing power flops one way Legal obligations flow back

5. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Types of Financial Intermediaries FINANCIAL INTERMEDIARIES Depository Institutions Commercial Banks Savings and Loans Credit Unions Mutual Savings Banks Issue Checkable Deposits Other Intermediaries Life and Casualty Insurance Companies Pension Funds Mutual Funds and Money Market Mutual Funds Finance Companies Issue Other Financial Claims

6. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Influence of the Fed’s Monetary Policy Overall performance or health of the economy: Inflation Unemployment Growth Economic Behavior of households, businesses, governments, and foreigners Financial SystemThe Federal Reserve

7. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Long-Run Economic Growth and the Business Cycle Year Total Quantity of Good and Services Produced (Hypothetical) Recession (Contraction) Expansion (Recovery) Fluctuation of the Economy (Cycling) Trough PeakLong- Term Trend Expansion (Recovery)

8. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Average Inflation, Unemployment, and Growth During Recent Decades InflationUnemploymentGrowth (Output) 1960s2.4%4.75%4.4% 1970s7.06.253.2 1980s5.5*8.252.8 1990s3.35.7**3.7 2000-2001***3.64.12.2 *Actually, if 1980 and 1981 are not considered, inflation averaged just under 4 percent for the remainder of the 1980s. **From mid-1997 through the rest of the decade, unemployment was below 5 percent. ***Annualized through second quarter 2001 only. SOURCE: http://www.stls.frb.org/fred/http://www.stls.frb.org/fred/