Chapter 26 Review

I thought this chapter was relatively hard compared to the previous chapter because there were many vocabulary terms to understand, and the concepts of this chapter are new to me, so it took a longer time for me to grasp the subject. (Stocks/stockholders and private/public saving) I would rate this chapter a 2/3.

Chapter 26 starts off describing how the Unites States financial system is made up of many types of financial institutions, such as the bond market, the stock market, banks, and mutual funds. All these institutions act to direct the resources of households that want to save some of their income into the hands of households and firms that want to borrow.  

The book, later on, talks about national income accounting identities, which reveals some important relationships among macroeconomic variables. In particular, for a closed economy, national saving must equal investment. In a bond, the company will borrow money from the public in the promise of eventually paying the initial amount back, along with some interest. Of course, there are dangerous of defaulting on a bond, which can be made up for by offering higher interest rates to incentivize lenders. Stocks are introduced by Mankiw as a share of the company. If the company profits, so do the stockholders, but if the company loses, the bondholders get paid first before the stockholders get anything.

The book then moves to financial intermediaries, and the two examples used to explain are banks and mutual funds. Banks are explained by Mankiw as a place where people put their money in, and the bank will pay them interest on their money in exchange for lending out their money to borrowers for a slightly higher interest rate. This allows for a small profit for the bankers. Mutual funds seem to be less risky than either option since it’s not focusing all “your eggs in one basket” as Mankiw states. That was the first half of the chapter, and the second half seemed to just explain government surplus/deficit as well as private/public saving.