Wednesday, February 15, 2006

Supplying Saving vs. Supplying Securities

I wanted to make an important distinction that I feel was not entirely clear in class. I will use an example with bonds, but you can replace stocks with bonds here and everything would still be correct. First, if you are SUPPLYING saving, you are actually demanding bonds. If you are supplying (also referred to as issuing or selling) bonds, you are DEMANDING saving, i.e. borrowing. Notice that the roles are reversed in depending on whether you are talking about loanable funds or financial instruments. I mention this because understanding the concept of selling vs. buying bonds will be very important later.


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