c. Definition of Budget Surplus: an excess of tax revenue over government spending.
d. Definition of Budget Deficit : a shortfall of tax revenue from government spending.
11. The fact that S = I means that for the economy as a whole saving must be equal to investment.
B. The Meaning of Saving and Investment
1. In macroeconomics, investment refers to the purchase of new capital, such as equipment or buildings.
2. If an individual spends less than he earns and uses the rest to buy stocks or mutual funds, economists call this saving.
IV. The Market for Loanable Funds
A. Definition of Market for Loanable Funds: the market in which those who want to save supply funds and those who want to borrow to invest demand funds.
B. Supply and Demand for Loanable Funds
1. The supply of loanable funds comes from those who spend less than they earn. The supply can occur directly through the purchase of some stock or bonds or indirectly through a financial intermediary.
2. The demand for loans comes from households and firms who wish to borrow funds to make investments. Families generally invest in new homes while firms may borrow to purchase new equipment or to build factories.
3. The price of loanable funds is the interest rate.
a. All else equal, as the interest rate rises, the quantity of loanable funds supplied will increase.
b. All else equal, as the interest rate rises, the quantity of loanable funds demanded will fall.