Introduction to Finance

DISCUSSION QUESTION 1
How were your family and you impacted by the 2007–08 fi nancial crisis?
2.2
Process of Moving Savings 
Into Investments
Financial institutions and markets move or transfer money from individuals and institutions 
with excess money to business fi rms and others who have needs for more money. We usually 
look at individuals in total, or in the aggregate, as an economic unit. Financial institutions, 
business fi rms, and governments (federal, state, and local) also are viewed as economic units. 
A 
surplus economic unit
generates more money than it spends, and thus it has excess money 
to save or invest. A 
defi cit economic unit
spends more money than it brings in and must 
balance its money receipts with money expenditures by obtaining money from surplus units. 
Individuals taken as a group have generally been a surplus economic unit in the past. 
Of course, while some individuals are saving, others are borrowing to cover the purchase of 
goods and services. Individuals desiring to purchase homes also borrow by taking out mort-
gage loans. Some business fi rms are savers when their revenues exceed their costs of opera-
tion and reinvest back into the businesses. Other businesses choose to borrow or sell stock to 
fi nance their operations and grow their businesses with the intent of providing higher returns 
to their investors. Private sector fi nancial institutions also have responsibilities to provide 
returns to their investor-owners and sometimes borrow heavily to grow their institutions and, 
hopefully, provide higher returns. Sometimes, government entities (federal, state, and local) 
have tax revenues that exceed expenditures and, thus, are surplus economic units. However, 
when government entities spend more than they receive from tax revenues, they must borrow 
the money shortfall and, thus, are defi cit economic units.
The ability of the U.S. fi nancial system to operate eff ectively over time depends on each 
of the three overall economic units (individuals, business fi rms, and government entities) 
achieving a reasonable balance between their aggregate revenues and expenditures. When 
expenditures exceed revenues for extended periods of time, defi cit economic units must build 
up large amounts of debts. A major factor in the severity of the 2007–08 fi nancial crisis and