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CHAPTER 1

CHAPTER 1. Introduction and Overview. Income greater than spending SSUs. SSUs and DSUs. Spending. Spending. Income. Income. Spending greater than income DSUs. Surplus Funds available to be lent in financial markets. Investment in newly constructed houses.

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CHAPTER 1

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  1. CHAPTER 1 Introduction and Overview

  2. Income greater than spending SSUs SSUs and DSUs Spending Spending Income Income Spending greater than income DSUs

  3. Surplus Funds available to be lent in financial markets Investment in newly constructed houses Investment in new capital (plant and equipment) and additions to inventory Surplus Funds Available to be lent in financial markets The Uses of Saving TOTAL SAVING HOUSEHOLD SAVING (Income not spent on consumption) + + BUSINESS SAVING (Income not distributed to the owners of the business firms) = = INVESTMENT PLUS SURPLUS FUNDS

  4. DIRECT FINANCE Surplus Spending Units (Lenders) Financial Markets (Stock market, bond Market, etc.) Deficit Spending Units (Borrowers) Purchasing power flops one way Legal obligations flow back The Financial System INDIRECT FINANCE Financial Intermediaries (Banks, savings and loan associations, etc.)

  5. Depository Institutions Other Intermediaries Commercial Banks Savings and Loans Credit Unions Mutual Savings Banks Life and Casualty Insurance Companies Pension Funds Mutual Funds and Money Market Mutual Funds Finance Companies Issue Checkable Deposits Issue Other Financial Claims Types of Financial Intermediaries FINANCIAL INTERMEDIARIES

  6. The Federal Reserve Financial System Economic Behavior of households, businesses, governments, and foreigners • Overall performance or health of the economy: • Inflation • Unemployment • Growth The Influence of the Fed’s Monetary Policy

  7. Long-Run Economic Growth and the Business Cycle Peak Long-Term Trend Total Quantity of Good and Services Produced (Hypothetical) Fluctuation of the Economy (Cycling) Expansion (Recovery) Trough Expansion (Recovery) Recession (Contraction) Year

  8. Average Inflation, Unemployment, and Growth During Recent Decades Inflation Unemployment Growth (Output) 1960s 2.4% 4.75% 4.4% 1970s 7.0 6.25 3.2 1980s 5.5* 8.25 2.8 1990s 3.3 5.7** 3.7 2000-2001*** 3.6 4.1 2.2 *Actually, if 1980 and 1981 are not considered, inflation averaged just under 4 percent for the remainder of the 1980s. **From mid-1997 through the rest of the decade, unemployment was below 5 percent. ***Annualized through second quarter 2001 only. SOURCE: http://www.stls.frb.org/fred/

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