Question: 1. What is the difference between direct finance and indirect finance? 2. What are the main institutions in the direct finance system of an economy?

1. What is the difference between direct finance and indirect finance?

2. What are the main institutions in the direct finance system of an economy? What are the main institutions that constitute the indirect finance system in a country?

3. What are the sources of national savings in a closed economy? Does a government increasing taxes and/or social security transfers impact the amount of national savings in a closed economy? Why or why not? (Hint: Consider the savings identity for this question.)

4. Where does the demand for loanable funds come from in a closed economy? How does a government adopting a policy of taxing investment from the private sector impact the demand for loanable funds? What happens to the equilibrium interest rate following this policy? Illustrate using the supply and demand in the market for loanable funds.

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