Module 22

Saving,
Investment, and
the Financial System
KRUGMAN'S
MACROECONOMICS for AP*
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
 atching up Savings and
nvestment Spending

• Physical Capital

• The Source of
Physical Capital
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
The Savings-Investment Spending
Identity

• Now, more complexity

•Budget Surplus

•Budget Deficit

•Budget Balance

•National Savings v. Private Savings

•Capital inflow
The Financial System

• Wealth

• Financial Asset

• Physical Asset

• Liability
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