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45 Cards in this Set
- Front
- Back
Why do Individuals Save?
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1. Meet future expenditures
2. To protect against an economic emergency |
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Why do Nations save?
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1. To produce new capital goods - to promote growth and hight standards of living in the future
2. National saving = savings by households, businesses and governments |
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Saving of an economic unit =
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current income - spending on current needs
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Saving rate of ANY economic units =
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Saving divided by its income
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Wealth =
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The value of assets minus liabilities
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Assets =
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Anything of value that one owns either finicial (cash, stocks, bonds, etc.) or real (real estate, jewelry, consumer durables like cars etc.)
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Liabilities =
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debts one owes (credit card balances, loans, mortgages,etc.)
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Net Worth =
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comparing an economic unit's assets and liabilities
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Balance Sheet =
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the particular date that this comparison is made (net worth)
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Flow =
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A measure that is defined per unit of time (e.g. savings)
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Stock =
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A measure that is defined at a point in time (e.g. wealth)
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Every dollar a person saves adds to his/her _______
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WEALTH
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The flow of saving causes the
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stock of wealth to change
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Capital Gains =
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increase in the value of existing assets - may decrease the urge to save
ex: higher value of a stock |
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Capital Losses =
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decrease in the value of existing assets - may increase the urge to save
ex: decrease in house prices |
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Capital gains are part of _____
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WEALTH
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Change in Wealth =
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saving + capital gains - capital loss
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US rates of savings are generally
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low
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low household saving can be offset by
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savings by businesses or government
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Savings in Japan
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Highest rate in 2007
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How did Americans increase their wealth during the 1990s, while household savings fell? (Bull Market)
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more stocks acquired with enormous capital gains
leading to increased wealth |
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Low household saving a problem?
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Macro- No
Micro- Yes: problem of growing inequality in wealth, richer get richer and the poor get poorer |
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Y = C + I + G + NX
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Y=real income or expenditure
C=consumption I=investment G=government NX=net exports |
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National Saving (S) =
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Current Income (Y) - spending on current needs
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Net Taxes (T) =
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Total taxes - Transfer payments - government interest payments
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Private saving =
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the after tax income of the private sector minuw consumption expenditures
Y - T - C |
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Public saving =
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the saving of the government sector is net tax payments minus government purchases
T - G |
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Private Saving is done by
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households and businesses
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Government Budget Surplus
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the excess of government tax collections over government spending
T - G, IT EQUALS PUBLIC SAVING |
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Government Budget Deficit
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the excess of government spending over tax collections
G - T |
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Balanced Budget =
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G = T
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Reasons for change in government budget
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lower income (lower taxes), government spending increased (wars, homeland security)
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Life-cycle saving =
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saving to meet long-term objectives - retirement, college attendance, purchase of a home
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Precautionary Saving =
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saving for a 'rainy day' - loss of a job, medical emergency
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Bequest Saving =
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saving for the purpose of leaving an inheritance -small business, farms, wealthy individuals
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What makes people not save?
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social security, medicare
mortgages confidence increasing value of stocks readily available home equity loans |
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Investment =
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the creation of new capital goods and housing - is necessary to increase average labor productivity
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National Saving is
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the source of funding for investment
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Substitution effect =
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increases the return on savings and the opportunity cost of consumption
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Wealth (income) effect =
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Increases wealth, reduces the savings needed to achieve goals
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Supply of savings (S)
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the quantity supplied of saving is positively related to the real interest rate (r)
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Demand for Saving (I)
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the quantity demanded for saving is negatively related to the real interest rate (r)
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Market of Savings
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market will determine equilibrium
-if r is above equilibrium a surplus of savings will exist and vice versa |
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Crowding Out =
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the tendency of govt. budget deficits to reduce investment spending, leads to lower capital formation and lower rate of economic growth
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How can we increase National Saving?
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reduce govt. budget deficit, increase incentives for households
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