AP Macroeconomics: Saving, Investment, and the Financial System

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financial system


financial markets

financial institutions through which savers can directly provide funds to borrowers


a certificate of indebtedness, a debt finance


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


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


=GDP - consumption - government purchases


=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


crowding out

a decrease in investment that results from government borrowing

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