PRINCIPLE OF ECONOMICS

Chap 26: Savings,

Investment & the
Financial System

PE13 - GROUP 9
Table of Contents
01 02 03
POLICY 1: SAVING POLICY 2: INVESTMENT POLICY 3:
INCENTIVES INCENTIVES GOVERNMENT BUDGET
DEFICITS AND
SURPLUSES
Policy 1: Saving
Bond = $1,000
t = 30 years
i = 9%
Incentives => P = ?

Ability to produce goods and services = P = Bond x (1+i)^30

country's standard of life = 1,000 x (1+0,09)^30 = $13,268
=> saving is a key long-term determinant.
=> people respond to incentives. ? Being taxed by 3% => i' = 6%

P = 1,000 x (1+0,06)^25 = $5,743

Free of tax policy
S curve:
shifts right.
New equilibrium:
Lower interest rate
Higher quantity of
loanable funds
Motivated to borrow
more to finance
greater investment.
 Policy 2: Investment Incentives:

WHICH CURVE DOES IT AFFECT?

Demand

AN INVESTMENT TAX CREDIT

is beneficial since it lowers the cost of borrowing money,
which encourages investment.

CONCLUSION
The policy encourages higher interest rate; more saving
and investment in the economy.
Policy 3: Government Budget

Deficits and Surpluses

A budget deficit is an excess of government spending over tax revenue
A budget surplus, an excess of tax revenue over government spending,
can be used to repay some of the government debt
If government spending exactly equals tax revenue, the government is
said to have a balanced budget
Policy 3
When the government reduces national
saving by running a budget deficit, the
interest rate rises and investment falls.

The most basic lesson about budget deficits

THANK YOU!

PE 13 | CHAP 26 | GROUP 9