Chapter 26

Chapter 26 is about examining our financial system and its relationship with saving and investment. Financial markets are places where a person can provide money to some who needs to borrow it. Two financial markets are the bond market and the stock market. There are three characteristics of ds that are most important: a bond's term, its credit risk, and its tax treatment. In the stock market, equity finance is the sale of a stock to rise money. Debt finance is the sale of bonds. Financial intermediaries are institutions where savers can indirectly provide funds to borrowers. Two important financial intermediaries are banks and mutual funds  The interest rate in the economy adjusts its itself to balance the supply and demand for loanable funds. Saving is the source of supply, while investment is the source of demand. A closed economy is one that doesn't interact with other economies. Its equation is Y=C+I+G. This equation shows that GDP is the sum of consumption, investment, and government purchases. Imports and exports are zero because a closed economy isn't involved in trade. The interest rate in the economy adjusts to balance the supply and demand for loanable funds. Saving is the source of supply, meanwhile investment is the source of demand for loanable funds. The interest rate is the price of the loan. If a reform of tax laws encouraged greater saving, the result would be lower interest rates and greater investment. If a reform of tax laws encouraged more investment, the result would be higher interest rates and greater saving. A budget surplus increases the supply of loanable funds, reduces the interest rate, and encourages investment. I thought the section of this chapter on the history of the US government debt was interesting and informative.