AP Macroeconomics: Saving, Investment, and the Financial System

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financial system

the group of institutions in the economy that help to match one person's saving with another person's investment

financial markets

financial institutions through which savers can directly provide funds to borrowers

bond

a certificate of indebtedness, a debt finance

term

length of time until the bond matures

credit risk

probability that the borrower will fail to pay some of the interest or principal

tax treatment

the way tax laws treat the interest earned on the bond

stock

a claim to partial ownership in a firm, an equity finance

financial intermediaries

financial institutions through which savers can indirectly provide funds to borrowers

mutual fund

an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds

national saving

the total income in the economy that remains after paying for consumption and government purchases

investment

=GDP - consumption - government purchases

savings

=investment (in a closed economy); also =(GDP - taxes - consumption) + (taxes - government expenditure)

private saving

the income that households have left after paying for taxes and consumption

public saving

the tax revenue that the government has left after paying for its spending

budget surplus

an excess of tax revenue over government spending

budget deficit

a shortfall of tax revenue from government spending

market for loanable funds

the market in which those who want to save supply funds and those who want to borrow to invest demand funds

crowding out

a decrease in investment that results from government borrowing

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